NFTs as securities under U.S. law

Non-fungible tokens (NFTs) exploded into mainstream culture between 2020 and 2022, with collections like CryptoPunks, Bored Ape Yacht Club, and NBA Top Shot selling for millions. Marketed as digital collectibles, NFTs promised verifiable ownership of art, music, and virtual assets on the blockchain.

But as the hype cooled, regulators began asking a fundamental question: are NFTs just digital trading cards, or are they unregistered securities under U.S. law?

This debate has massive implications. If NFTs are deemed securities, issuers and marketplaces could face strict registration, disclosure, and compliance requirements. The question strikes at the heart of how law will treat digital ownership and innovation in Web3.

The Legal Framework: The Howey Test

Under U.S. law, an asset may be considered a security if it meets the criteria of the Howey Test, derived from a 1946 Supreme Court case. According to this test, an investment contract exists if:

1. An investment of money

2. In a common enterprise

3. With a reasonable expectation of profits

4. To be derived from the efforts of others

While designed for orange groves in the 20th century, the Howey Test now underpins the SEC’s approach to digital assets. Applied to NFTs, the question becomes: do buyers purchase NFTs primarily for personal enjoyment and ownership, or are they investing with an expectation of profit based on the issuer’s efforts?

SEC’s Position on NFTs

The SEC has not issued comprehensive NFT guidance, but enforcement actions provide clues.

• MakersPlace & NBA Top Shot: So far, major platforms selling collectibles like art and sports highlights have largely avoided SEC scrutiny, suggesting pure collectibles may not be securities.

• Impact Theory (2023): The SEC charged Los Angeles–based media company Impact Theory with offering unregistered securities via NFT sales. The NFTs were marketed as an investment in the company’s success, with promises of future benefits. The case marked the first official SEC enforcement against NFTs as securities.

• Stoner Cats (2023): The SEC fined the creators of the animated show Stoner Cats for selling NFTs that were marketed as investments tied to the show’s success.

These cases reveal the SEC’s focus: NFTs marketed with promises of profit, revenue sharing, or investment-like features are most at risk of being classified as securities.

Categories of NFTs: Securities or Not?

Not all NFTs are created equal. Their classification depends on design and marketing:

Likely NOT Securities

• Art & Collectibles: NFTs representing digital art, music, or gaming items sold for personal use or enjoyment.

• Utility NFTs: Tokens granting access to memberships, event tickets, or in-game features without investment promises.

Likely Securities

• Fractionalized NFTs: Splitting a high-value NFT into fungible tokens for investment purposes.

• Royalty-Bearing NFTs: Offering buyers a share of profits from secondary sales or project revenues.

• Speculative NFTs: Marketed as investments with an expectation of future appreciation based on team efforts.

The distinction lies not in the token itself, but in how it is marketed and what buyers expect.

Arguments Against Classifying NFTs as Securities

NFT advocates push back against the securities label:

1. Ownership, Not Investment: Buyers are acquiring digital property, not shares in a company.

2. Cultural Expression: NFTs are closer to art and collectibles than to financial instruments.

3. Innovation at Risk: Overregulation could stifle creativity in art, gaming, and digital media.

4. Technology Neutrality: The blockchain medium should not automatically make collectibles into securities.

This perspective argues that applying securities law too broadly misunderstands the nature of digital ownership.

The Risks of Overreach

If NFTs are broadly classified as securities, the consequences could be significant:

• Marketplaces (e.g., OpenSea, Rarible): Might need to register as securities exchanges.

• Issuers & Artists: Could face compliance costs, legal liability, or SEC penalties.

• Retail Buyers: Secondary markets for NFTs could dry up under strict securities regulations.

This could push NFT innovation offshore, just as some crypto firms relocated due to regulatory uncertainty in the U.S.

The Middle Ground: Case-by-Case Analysis

Legal experts argue the best approach is not a blanket classification, but case-by-case analysis. Much like baseball cards or Beanie Babies, most NFTs are collectibles—but if marketed with profit expectations, they cross into securities territory.

The SEC’s recent cases suggest a targeted strategy: pursue issuers who blur the line between cultural products and investment schemes, rather than criminalizing all NFTs.

Congressional and Industry Pushback

Lawmakers and industry groups have called for clearer guidance:

• Some advocate for a new digital asset framework that distinguishes between utility tokens, collectibles, and investment contracts.

• Others argue existing securities laws are sufficient but need better application.

Until Congress acts, the SEC will likely continue regulating NFTs through enforcement—creating uncertainty for creators and investors alike.

Broader Implications: The Future of Digital Ownership

The NFT securities debate is not just about regulation—it’s about the future of digital culture. If NFTs are treated like stocks, they may lose their appeal as artistic and social tools. On the other hand, without oversight, bad actors could continue using NFTs for scams and unregistered fundraising.

The challenge is to strike a balance that protects investors while preserving innovation. Much like the early internet, NFTs are forcing regulators to rethink frameworks built for another era.

Conclusion: A Defining Question for Web3

The debate over NFTs as securities under U.S. law embodies the tension at the heart of crypto regulation: innovation versus protection, decentralization versus oversight.

For now, the answer is nuanced. Most NFTs used as art, collectibles, or access passes are safe from securities laws. But when projects market NFTs as investment vehicles with promises of profit, they cross the Howey threshold.

As regulators, courts, and lawmakers wrestle with this issue, the outcome will shape not only the NFT market but the broader concept of digital ownership in the Web3 era.

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