The law relating to nonfungible tokens continues to limp along without clear guidance.  In the past, the SEC has taken the general position that if you sell an NFT based on the express or implied promise of making a profit by reselling it, you are selling a security, even if the form of the NFT is a drawing or work of art.  And the SEC has levied fines on celebrity endorsers of such offerings who receive undisclosed direct or indirect fees for advertising the merits of buying that NFT.

Without presuming to being able successfully to explain the complex law here, the whole legal issue is polluted (or informed, depends on how you see it) by a 1946  U. S. Supreme Court case (“Howey”) that held that selling interests in a physical orange grove was the sale of a security because the “investor” relied on the efforts of the seller to run the grove for a profit and share that profit with the investor.  If you rely for profit on the effort of a third party, whatever you call the investment vehicle it is still akin to buying a share of stock and relying on the corporation to run a business and share the profit with shareholders.

Particularly where the proceeds of the NFT are to be used by the issuing company to build an asset that creates a potential profit, the SEC has taken the position that this is the same as investing in a company in hopes that shares of stock can be resold at a profit.

In an August enforcement action, the SEC forced a $6 million settlement with a company issuing NFTs to fund building a media platform, and this month levied a million dollar fine against a company developing a show.

SEC Chair Gensler has been unwilling to release clear guidance to the marketplace as to what precisely the SEC consider a security, and such an SEC position is not unusual– the forms of deals (whether NFTs or other offerings) are varied and  fluid, and the SEC often has waited years to see what is happening in the marketplace before giving guidelines.  However, since many NFTs represent efforts to raise money for artistic projects, the question is whether the SEC’s lack of guidance will stifle artistic creativity.  The definitional issues here are beyond both the scope of this post and the scope of clear understanding.

Finally and predictably, the two-person Republican minority on the SEC has dissented with respect to such above-referenced enforcement efforts, claiming that “[r]ather than arbitrarily bringing enforcement actions…, we ought to lay out some clear guidelines for artists and other creators who want to experiment with NFTs as a way to support their creative efforts and build their fan communities.”