Introduction
Digital collectibles, also known as Non-Fungible Tokens (NFTs), are characterized by their individual configurability. Whereas classic payment tokens, security tokens or service tokens have the same content within their slice, individual NFTs are linked to very specific rights or content. They are ideal for tokenizing collectibles such as art objects or trading cards. But they can also be used to tokenize rights, creating a range of new possibilities for a multitude of use cases. In projects for tokenization of assets or rights, questions of technical implementation arise, as well as legal questions, which can always be answered by a lawyer specializing in NFT. The key to a successful NFT project is the effective legal link between the NFT and the asset or right to be tokenized, as well as the regulatory design of the token. The latter concerns whether a capital markets prospectus needs to be prepared and approved prior to the Non-Fungible Token Sale and assessing whether the NFT constitutes a regulated crypto asset. In this article, we will outline the situations that may arise if these NFTs become regulated.
Past Regulatory Agendas
Until the fall of 2023, there were very few SEC enforcement actions or cases involving securities issues related to non-fungible tokens (“NFTs”). This changed dramatically. In the fall of 2024, the SEC quickly brought two enforcement actions against NFT projects for alleged securities law violations. Yet the SEC refused to provide regulatory guidance or rules regarding the treatment of NFTs as securities. Instead, the agency opted for selective enforcement action against NFT projects. The SEC has stepped up enforcement efforts against digital asset marketplaces for selling NFTs (and other digital assets) that the agency claims are securities. In each of these actions, the SEC cited the use of smart contracts to trigger resale royalty payments to the NFT issuer upon resale of an NFT as evidence supporting the classification of the NFT as a security. In response, some potential targets for SEC enforcement proactively sued the SEC, challenging its authority to regulate digital assets and/or seeking a declaration that digital assets are not securities. Further escalating tensions, several private plaintiffs have also filed civil lawsuits against NFT issuers and/or marketplaces. A bill has been introduced in Congress that aims to clarify NFT legal issues. In the meantime, anyone issuing NFTs or operating NFT marketplaces should take note of the recent flurry of NFT regulatory and litigation activity and consider whether they can mitigate the risk of becoming the next entity on the receiving end of an enforcement action or lawsuit.
SEC Targets Digital Asset Marketplaces and Marketplaces Fight Back:
On August 28, 2024, OpenSea (the largest NFT marketplace) announced that it received a Wells Notice from the SEC for selling NFTs allegedly as securities on its platform. The Wells Notice is not publicly available, but presumably the allegation is that OpenSea’s business activities constitute the operation of an unregistered securities exchange. In a notable response, OpenSea contributed to an NFT legal defense fund that raised $6 million to help cover legal fees for NFT creators and developers to defend against similar Wells notices they received. After receiving a Wells Notice from the SEC, in October 2024, Crypto.com filed a lawsuit against the agency seeking a declaratory judgment to prevent the SEC from unlawfully expanding its jurisdiction to cover secondary market sales of certain network tokens sold on Crypto.com’s platform
NFT Artists File Preemptive Suit Against SEC:
Two artists filed a preemptive lawsuit against the SEC on July 29, 2024, challenging the agency’s authority to regulate NFTs. Musician Jonathan Mann and artist and law professor Brian L. Frye filed a civil lawsuit against the SEC seeking a declaratory judgment confirming that NFTs representing ownership of their works do not constitute securities. The lawsuit seeks to proactively prevent the SEC from taking enforcement actions against future sales of NFT digital artworks.
The German Federal Financial Sector and Nft Regulation:
Bafin (German Federal Financial Sector) evaluates NFTs on a case-by-case basis regarding their classification as regulated instruments. According to its administrative practice, the qualification of Non-Fungible Tokens as regulated crypto assets can be considered in certain circumstances. Under German law, tokens can only be crypto assets if they are accepted as a means of exchange or payment or if they serve investment purposes. Due to their individual design, NFTs are rarely considered as means of payment or exchange. However, Non Fungible Tokens can be suitable for investment purposes. In this context, BaFin pays close attention to the expectations that the offeror of an NFT seeks to create in the eyes of potential buyers. For example, if it highlights the possibility of an NFT increasing in value as part of its selling arguments, this may already lead BaFin to characterize the token as a regulated crypto asset. In this case, for example, trading of the NFT on the secondary market would only be possible with a BaFin license. In this context, during the planning of a project, much attention should be paid to what special rights a token holder will receive and what marketing measures should be implemented in sales.
Bafin assumes in its administrative practice that NFTs typically cannot be characterized as securities. As each represents separate items and as a result NFTs are not sufficiently standardized, they cannot, in Bafin’s view, be traded like securities on the capital markets. In some cases, however, Bafin considers Non Fungible Tokens to be an asset investment under the German Asset Investment Act. The market launch of such NFTs usually requires the preparation of a capital market prospectus, which must be approved by Bafin prior to the token sale. In these cases, it is advisable to consult a law firm specializing in cryptoassets. The content of capital market prospectuses is rigorously checked by BaFin, and approval is only granted if full compliance with the legal minimum requirements for a capital market prospectus is ensured. In the case of NFT token sales without a prospectus, which is in fact required, responsible parties are threatened not only with administrative measures by Bafin, but also with compensation claims by NFT buyers. Therefore, careful planning of an NFT project, from the design of the token specifications to its sale to buyers, is advisable in all cases.
Opensea’s Request to the SEC
NFT marketplace OpenSea is asking US regulators to clarify that it and platforms like it should not be treated as securities exchanges or brokers. In a letter dated April 9, OpenSea’s general counsel Adele Faure and deputy general counsel Laura Brookover asked SEC Commissioner Hester Peirce to issue informal guidance confirming that NFT marketplaces fall outside the scope of broker-dealer and exchange rules.
“It would be regulatory overreach to classify OpenSea and similar NFT marketplaces as securities exchanges or brokers,” they wrote. The company claims it does not meet the legal definition of an exchange under US securities laws because it does not execute transactions or act as an intermediary. OpenSea describes itself as a digital marketplace rather than a trading floor, “allowing people to discover NFTs and connect with buyers and sellers” rather than facilitating trades in the traditional sense. It has also pushed back on the broker label, saying it does not provide investment advice, negotiate deals or store client assets. In the long run, he asked the Commission to exempt NFT marketplaces like OpenSea from the proposed broker regulation. The letter follows the SEC’s decision in February to shelve several high-profile investigations into crypto companies, including OpenSea. These decisions come at a time of a broader policy pivot in the Donald Trump administration embracing the crypto sector. But opponents question whether the president is simply trying to enrich himself.
Nft Law
Despite all of the above, the legal problems of the embattled NFT industry may find a solution through legislation. In September, Congressman William Timmons introduced the New Frontiers in Technology Act (“NFT Act”), which aims to address the legal and regulatory treatment of NFTs. The most important provisions of the NFT Act are:
Certain covered NFTs that exclude securities
A call for the creation of protections for “covered” NFTs, a term that primarily encompasses art and collectible NFTs, among other exempted categories, and specifically for the Comptroller General, who is not a financial regulator, to conduct a study on NFTs that will likely inform future NFT-related legislation and regulations. If the bill is passed, it would be a landmark for the NFT industry and would reverse the script on the SEC’s NFT enforcement agenda
NFTs as Securities:
Many NFTs that only represent a license of a digital asset have not raised red flags for regulators. However, it is possible for an NFT to be a security. For example, if NFTs are used to represent ownership of shares in a company, they may be securities. Depending on the totality of the facts and circumstances, there are other scenarios where NFTs could be securities. For example, some experts have suggested that NFTs may be securities if: i) they represent the division of an asset; ii) they represent the right to receive revenue (e.g., buying a tokenized song and receiving a share of future revenue from the song); or iii) pre-sale of NFTs with no current use (e.g., pre-sale of gaming NFTs where the video game is not yet available and the funds from the sale are used to build the game). Other scenarios may also result in NFTs being treated as securities. Each scenario is case-specific and should be analyzed individually.
Resale Copyrights:
The role of resale royalties, if any, in determining whether an NFT is a security is only one factor in a broader analysis. To our knowledge, the SEC has not taken a position that the existence of resale royalties necessarily means that an NFT is a security. However, it has relied on it as part of the analysis. Therefore, it is important to consider this as part of the overall analysis when structuring an NFT offering.
Marketing Disclosures:
In addition to representing ownership of a digital asset, some NFTs also represent a bundle of rights and/or entitlements. As some of the above cases illustrate, the SEC believes that it is important to evaluate what an NFT represents in addition to the marketing representations made by the issuer. To the extent that the issuer’s representations express the efforts promised to be undertaken by the issuer and that these efforts will enhance the value of the NFT, the SEC will view this as relevant to the Howey analysis.
For years, the SEC has been criticized for its policy of “regulation by enforcement” and its lack of actionable rules. Under former Chairman Gary Gensler, the agency operated as if all cryptocurrencies except Bitcoin were under its jurisdiction and subject to securities laws.
Conclusion
In February, the SEC dropped its OpenSea investigation amid a wave of regulatory rollbacks under a more crypto-friendly administration. As part of President Trump’s first official actions, he directed the agency to clarify its position on crypto and establish a “Crypto Task Force” to engage with the industry on drafting guidance
How the president-elect’s seemingly pro-crypto stance will translate into concrete policies and regulations for the sector remains unclear. However, early indications suggest that the incoming administration intends to foster a more supportive regulatory environment for the NFT space and crypto in general, with a focus on encouraging innovation and growth through regulatory clarity rather than the enforcement-driven approach the sector has recently experienced. We will continue to closely monitor developments regarding the NFT until the upcoming change in executive branch leadership. Given the ongoing litigation and the lack of formal guidance specifically addressing NFTs, past and future NFT issuers and marketplaces face some uncertainty. As a result, companies that have concerns about whether the NFTs they have issued or plan to issue implicate the law can take certain steps to minimize the risk of a sanction.
