4. Are NFTs Securities ?

Should NFT Investors be Worried About Regulation?

For now, NFTs investors shouldn’t be worried…but they should be wary. NFTs are already walking a fine line, as the SEC has regulated other digital assets. Here are just a few of the places where NFTs could misstep and slip into the crevasse of regulation:

Secondary Sales/Profit Redistribution

When Zoë Roth auctioned off her Disaster Girl NFT for $473,000, she included a contract term stating that each time it sold again, she’d get a share of that sale, too.

Such stipulations are becoming more common among artists looking to generate passive income from their NFT sales — and they’re also attracting SEC attention, implying a common enterprise and expected profits down the road.

The Secondary Market

NFTs are able to skirt regulatory scrutiny because creators do not market them as investments.

But what about the investors who buy them? What happens when they market them as suitable investments to attract other investors and artificially inflate values?

Secondary NFT sales reached $15 billion in 2021, begging the question: How long until a specific subpopulation of buyers, the investors, become too loud for regulators to ignore?

Corporate Marketing

Folks sometimes forget that Bitcoin started just like NFTs: a cool, new technology that was never intended to become an investment.

And yet, once values rose, marketplaces emerged to facilitate trade–and many of these marketplaces didn’t hesitate to market their wares as “investments.”

Bitcoin has managed to avoid becoming a security because it has no central leadership or authority.

But NFTs have clear paper trails leading back to their creators. So, if you one day mint an NFT on a website that markets your creation as an investment, the SEC might come for you both!

Partial Ownership AKA Fractionalization

Historically speaking, when you’re able to purchase a fractional share of an asset, that’s a clear sign to the SEC that it’s an investment vehicle.

After all, the “it’s just art and I like it” defense falls apart pretty quickly when you buy 1/826th of a painting.

Case in point, the company Masterworks, which sells partial ownership in physical art, must register their transactions with the SEC.

With NFT prices skyrocketing, how long before creators and investors do a “stock split” to attract more buyers?

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