Fuck it. NFTs are securities.
It’s time to face reality and stop deluding ourselves. NFTs that offer tokens, utility, and any hint of an ROI are securities.
The Howey Test is the supreme court-endorsed standard for determining whether something is a security, and guess what? The vast majority of NFTs check every single box.
The Howey Test was established by the Supreme Court in 1946 to determine if a particular investment scheme is a security. The test is based on a case involving the sale of tracts of citrus groves by Howey Company to buyers in Florida. The buyers would then lease the land back to Howey Company, who would then sell the fruit grown on the land. Both parties shared in the revenue generated from the sale of fruit. Most buyers had no experience in agriculture and were not required to tend to the land themselves.
Howey failed to register the transactions with the U.S. Securities and Exchange Commission (SEC). As a result, the SEC got involved. The court’s final ruling determined that the leaseback arrangements qualified as investment contracts.
According to the precedent laid out by SEC v. W.J. Howey Co., an investment contract is:
- An investment of money
- In a common enterprise
- With the expectation of profit
- To be derived from the efforts of others
Based on this, no matter how much we obfuscate the question with JPEGs, protestations about art, or weak comparisons to baseball cards, the answer will always be the same. NFTs are securities.
There are exceptions — drops that offer nothing more than art, content, or membership as utility, music NFTs, 1:1 art pieces, etc. But the projects that capture headlines and convert millions of dollars in sales are building castles of sand when they try to convince their communities that they’re anything other than a financial investment product.
When you really examine them, most of these drops aren’t much more than ICOs with pretty pictures attached.
Before you get too upset, let me explain why this is actually a good thing. For one, it means that we can finally start having an honest conversation about the rules and regulations around NFTs and begin to build a better ecosystem, one that isn’t full of fly-by-night nonsense, one that doesn’t prey on retail investors, and one that can actually fulfill its promise of revolutionizing industries.
When we can emerge from the grey area and begin to take advantage of securities as a mechanism, we can explore funding opportunities for drops that eclipse our current NFT offerings by magnitudes. We can create a mature market where more brands, more investors, more retail, and more R&D can go deeper and explore the possibilities of NFTs, their use cases, and how they can change our world.
I’m not a regulatory maxi. In my perfect, libertarian world, a small government approach would give us the freedom we need to tear down existing financial infrastructure and run wild with true decentralization. But we don’t live in that perfect world, and we’ve yet to show that as an ecosystem, we have any actual ability or appetite to self-regulate to a satisfactory degree.
We are on the precipice of a new era for NFTs, but only if we’re willing to accept that what we have now is just the beginning. We need to stop being afraid of the s-word, and start working on building a better future for NFTs. Otherwise, we’re just going to keep shooting ourselves in the foot.