Is Your NFT a Security?

If your NFT is a security, then absent specific exceptions, the offering of your NFT must strictly adhere to the U.S. Securities and Exchange Commission (SEC) rules, regulations and registration requirements. This applies to sellers and exchanges.

What is a security? Are NFT’s securities?

Before I discuss these questions, please be advised that no legal or financial advice is being given. Contact a professional with questions, legal or financial needs. This disclaimer is incorporated here.

Under the U.S. Supreme Court case SEC v. Howey Co., 328 U.S. 293 (1946), the court gave four factors for determining whether an investment is a security:

#1. Is there an investment in money?
#2. In a common enterprise?
#3. Is there an expectation of profit?
#4. Is the profit expected to be derived from the efforts of a promoter or third party?

The sale of a single NFT sale may take on the form of a work of art or collectible rather than a security. It depends on the facts.

Factional NFTs are tokens that represent an interest or fractional ownership of an NFT. The four factors of the Howey test seem to be present in fractional NFTs more so than the sale of a single NFT work of art or collectible.

For these reasons, most companies dealing with fractionalized art ownership of traditional physical art comply with SEC rules, regulations and requirements. With this in mind, the safe bet is that many, if not most, fractional NFTs may also be determined to be investments in securities.

Author: Mitch Jackson

I'm a California trial lawyer trying to fix the world one client, cause, and digital interaction at a time.

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