NFTs Under Scrutiny: OpenSea Faces SEC Wells Notice Over Securities Allegations

On August 28, local time, OpenSea disclosed that it received a Wells notice from the U.S. Securities and Exchange Commission (SEC), signaling that the leading NFT company might face charges for violating securities laws.

As a global leader in the NFT trading platform, OpenSea has always been at the core of the NFT market, with its transaction volume reaching a historic high in 2021. The SEC's focus is on certain NFT projects that may have violated securities laws by promising investment returns or using NFTs as financial instruments. As more NFT projects are traded on the OpenSea platform, the SEC initiated investigations into these projects, ultimately leading to the issuance of the Wells notice. The Wells notice implies that the SEC is considering legal action against OpenSea, as some NFT transactions on its platform may constitute unregistered securities offerings.

OpenSea CEO Devin Finzer responded by stating that the company is committed to providing $5 million to cover legal fees for NFT artists and developers who may receive Wells notices from the SEC, to ensure that “creators can continue to innovate without fear.”

Note: A Wells notice is a formal warning issued by the SEC to individuals or companies, indicating that they may face legal action, usually signifying that the investigation has reached a serious stage.

Industry Voices Support for OpenSea

The crypto community reacted strongly to the news of OpenSea receiving the Wells notice, with several industry figures openly supporting the platform.

Tyler Winklevoss, founder of Winklevoss Capital Management and Gemini Exchange, remarked:

“The SEC is now trying to claim that NFTs are securities. What‘s next？ Baseball cards？ Comic books？ Gary Gensler’s malicious and un-American war on crypto is expanding. Digital web3 creators and artists are now the target.”

Variant Fund CLO Jake Chervinsky argued that NFTs should not be bound by laws drafted decades ago (the Securities Act was passed in 1933):

“The SEC has completely lost the plot. The idea that a financial market regulator, founded in the 1930s, would have jurisdiction over digital art in the 2020s is not only counterintuitive but beyond the SEC's statutory authority. Thank you, OpenSea, for fighting for justice.”

Additionally, prominent figures like Bankless co-founder Ryan Sean Adams, VC Adam Cochrane, and former CFTC commissioner Brian Quintenz expressed dissatisfaction with this approach.

SECs Ongoing Focus on the NFT Industry

Although NFTs are generally not considered securities due to their nature and usage—such as being unique and indivisible and often having non-financial purposes—their classification as securities depends on specific use cases and legal frameworks. Specifically, it hinges on whether they meet the SECs Howey Test, which determines an asset as a security if:

1. It is an investment;

2. The investment funds are used in a common enterprise;

3. Investors expect profits derived from the efforts of others.

The U.S. Securities and Exchange Commission (SEC) first classified NFTs as securities in August 2023. This landmark event occurred during the SEC‘s enforcement action against Impact Theory, a media company accused of raising nearly $30 million through the sale of NFTs. The SEC found that the company's marketing of its “Founder's Keys” NFTs led purchasers to expect profits from their investment, and the realization of these profits depended on the company’s future development and efforts. The SEC determined that Impact Theory's NFTs met the criteria of the Howey Test and therefore classified them as securities.