The NFT Securities Spectrum
In my practice advising NFT projects, I've learned that the question "Is my NFT a security?" has no universal answer. The analysis depends entirely on what the NFT represents, how it's marketed, and what economic rights attach to it. A profile picture NFT sold purely for aesthetic value is treated completely differently than a fractionalized real estate NFT promising rental income.
The SEC has made clear through enforcement actions that the "NFT" label provides no magical exemption from securities laws. When I analyze an NFT project, I focus not on the technology but on the economic reality of the transaction. What are buyers actually purchasing, and why?
⚠ The Marketing Matters as Much as the Asset
I've seen projects with nearly identical smart contracts receive opposite regulatory treatment. The difference? One marketed their NFTs as collectibles with artistic value, while the other emphasized investment returns and passive income. How you sell an NFT often determines its regulatory classification.
NFT Securities Risk Spectrum
NFT Categories & Securities Risk
Digital Art & Collectibles - Generally Not Securities
Pure digital art NFTs, where the value derives from artistic merit, cultural significance, or collector demand, typically fall outside securities regulation. In my analysis, these are analogous to traditional art sales - buying a painting isn't investing in a security even if I hope it appreciates.
✅ Typically NOT Securities
- Profile picture (PFP) collections
- One-of-one digital artworks
- Photography NFTs
- Generative art (Art Blocks style)
- Cultural/meme collectibles
- Digital trading cards
⚠ BUT Watch For These Red Flags
- Promises of floor price appreciation
- Revenue sharing from future sales
- Staking rewards in project tokens
- DAO governance with treasury rights
- "Investment opportunity" marketing
- Roadmap focused on financial returns
Gaming Items - Usually Not Securities, But...
In-game items that players use for actual gameplay typically aren't securities. However, the "play-to-earn" model has complicated this analysis. When gaming NFTs generate passive income or their primary appeal is economic rather than entertainment, I start seeing securities characteristics.
💡 The Consumption vs. Investment Test
I ask my clients: "Would someone buy this NFT purely for the gameplay experience, even if it had no resale value?" If the answer is yes, it's likely not a security. If the answer is "no one would play without earn potential," we have a problem.
Music & Media Royalty NFTs - Often Securities
NFTs that entitle holders to a share of streaming royalties, licensing fees, or other music revenue are where I see the clearest securities issues. These are essentially investment contracts - buyers invest money expecting returns from the artist's promotional efforts.
- Royalty streams: Share of Spotify/Apple Music revenue = likely security
- Master ownership fractions: Co-owning a song master = likely security
- Fan tokens with dividends: Revenue sharing from tours = likely security
- One-time song access: Buying to listen = likely NOT a security
Fractionalized NFTs - Almost Always Securities
When I see fractionalization, my securities analysis almost always concludes these are investment contracts. Breaking an expensive NFT into tradeable fractions creates the exact pooled investment structure that Howey addresses.
🚨 F-NFT Platforms on Notice
Platforms like Fractional.art (now Tessera) and Niftex have faced regulatory scrutiny. In my view, F-NFT platforms are operating unregistered securities exchanges unless they obtain proper licensing or limit to accredited investors under Reg D.
Real Estate-Backed NFTs - Likely Securities
NFTs representing ownership interests in real property, rental income rights, or real estate fund shares are securities under almost any analysis. These combine traditional real estate securities law with digital asset complexity.
Revenue-Sharing NFTs - Typically Securities
Any NFT structure where holders receive ongoing payments from business operations triggers my securities concerns. This includes:
- Restaurant/bar revenue sharing
- Protocol fee distributions
- Merchandise royalties
- Content creator earnings splits
- Project treasury distributions
The Howey Test Applied to NFTs
The Supreme Court's 1946 Howey decision remains the foundation of my NFT securities analysis. An NFT is a security if it involves: (1) an investment of money (2) in a common enterprise (3) with an expectation of profits (4) derived from the efforts of others.
Prong 1: Investment of Money
This prong is almost always satisfied. Paying ETH, USDC, or fiat for an NFT constitutes an investment of money. I've seen arguments that free airdrops avoid this prong, but courts have been skeptical - even "free" distributions often require prior purchases, social media promotion, or other consideration.
Prong 2: Common Enterprise
The common enterprise analysis for NFTs focuses on whether buyer fortunes are tied together or to the project creators. In my practice, I see two types:
| Type | Analysis | NFT Examples |
|---|---|---|
| Horizontal Commonality | Buyers' fortunes tied together through pooled assets | Fractionalized NFTs, treasury-sharing DAOs, royalty pools |
| Vertical Commonality | Buyer fortunes tied to promoter's efforts | Collections dependent on founder marketing, platform development |
Prong 3: Expectation of Profits
This is often the decisive prong in my NFT analysis. The SEC and courts look at how the NFT is marketed and what buyers reasonably expect.
⚠ Profit Expectation Indicators
- "Floor price" discussions in marketing
- Staking rewards or yield promises
- Roadmaps emphasizing value appreciation
- Comparisons to early Bitcoin/ETH buyers
- Secondary market royalty emphasis
- "Get in early" messaging
✅ Consumptive Use Indicators
- Emphasis on art, culture, community
- Utility features (access, experiences)
- No discussion of price appreciation
- Clear that value may go to zero
- Focus on personal enjoyment
- No staking or passive income
Prong 4: Efforts of Others
I analyze whether NFT value depends primarily on the project team's efforts or the holder's own actions. Critical questions I ask:
- Does the team control smart contract upgrades?
- Is there a roadmap the team must execute?
- Do holders have meaningful governance power?
- Is value tied to team marketing and partnerships?
- Can the project succeed without the founding team?
💡 The Decentralization Defense
Truly decentralized projects may avoid the "efforts of others" prong. But in my experience, most NFT projects claiming decentralization still have identifiable teams driving value. Simply having a DAO doesn't create sufficient decentralization if the founders control treasury, development, and marketing.
SEC Statements & Enforcement Actions
SEC v. Impact Theory (August 2023)
The SEC's first pure NFT enforcement action. Impact Theory sold "Founder's Keys" NFTs, raising approximately $30 million. The SEC found these were unregistered securities because:
- Marketing emphasized potential profits from secondary sales
- Company promised to use proceeds to build an entertainment empire
- Buyers expected returns from company's entrepreneurial efforts
- Tiered pricing suggested investment-like structure
🔍 Stoner Cats Investigation (2023)
The Stoner Cats animated series sold NFTs to fund production, with holders getting exclusive access to episodes. The SEC determined these were securities because:
- Proceeds funded the production (investment in common enterprise)
- Buyers expected profits from secondary market appreciation
- Value depended on creators' efforts (celebrity involvement, marketing)
- 5% royalty on secondary sales reinforced profit expectations
Gary Gensler's Public Statements
SEC Chair Gensler has consistently stated that the "NFT" label doesn't determine regulatory treatment. In my monitoring of his statements, key themes include:
- "Substance over form" - Technology wrapper doesn't change underlying economics
- Fractionalization concerns - Breaking assets into pieces often creates securities
- Royalty payments - Ongoing returns suggest investment contracts
- Platform liability - Marketplaces may be operating unregistered exchanges
🔍 NBA Top Shot Litigation
This private class action alleges NBA Top Shot "Moments" are unregistered securities. While not an SEC action, the court's 2023 decision allowing the case to proceed provides important guidance:
- Court found plaintiffs plausibly alleged Howey elements
- Dapper's control over the marketplace weighed toward security finding
- Marketing emphasizing scarcity and value appreciation was problematic
- Case suggests even mainstream NFT projects face litigation risk
Secondary Market Considerations
Platform Liability for Trading Securities
When I advise NFT marketplaces, I emphasize that listing securities-like NFTs creates significant liability. A platform facilitating secondary trading of unregistered securities may be operating as an unregistered exchange or broker-dealer.
🚨 Marketplace Risk Exposure
OpenSea, Blur, and other marketplaces face existential regulatory risk if courts determine significant portions of their listed NFTs are securities. In my view, the industry is operating in a grace period that may end abruptly.
Royalty Payments as Investment Contracts
Secondary market royalties create particular problems in my securities analysis. When creators receive ongoing royalties from resales:
- Buyers may purchase expecting to profit from trading activity (speculation)
- The creator's ongoing marketing efforts drive secondary market value
- Royalties create income streams resembling securities dividends
- Platform enforcement of royalties suggests centralized control
NFT Marketplace Legal Issues
When Does a Platform Become an Exchange?
In my analysis, an NFT platform risks exchange classification when it:
- Matches buyers and sellers for securities transactions
- Provides order books or price discovery mechanisms
- Facilitates trading in F-NFTs or other clear securities
- Offers trading tools (limit orders, analytics) for securities
Broker-Dealer Registration Triggers
A platform may need broker-dealer registration if it:
- Takes transaction-based compensation for securities trades
- Solicits or recommends securities transactions
- Handles customer funds or securities
- Provides investment advice about which NFTs to buy
ATS Requirements for Fractionalized NFTs
Platforms trading fractionalized NFTs almost certainly need Alternative Trading System (ATS) registration. In my view, the current F-NFT ecosystem is largely non-compliant, operating either illegally or in regulatory limbo.
| Platform Type | Likely Requirements | Current Status |
|---|---|---|
| Pure Art Marketplace | None if only non-securities | Generally compliant |
| Mixed NFT Marketplace | Potentially BD/Exchange | Regulatory uncertainty |
| F-NFT Platform | ATS, BD registration | Largely non-compliant |
| Royalty NFT Platform | Potentially securities platform | Under scrutiny |
Custodial vs. Non-Custodial Structures
I generally advise marketplace clients to consider non-custodial structures where users maintain their own wallets. This reduces (but doesn't eliminate) certain regulatory exposures:
✅ Non-Custodial Advantages
- Avoids money transmitter licensing
- Reduces custody-related securities issues
- Users control their own assets
- Less AML/KYC complexity
⚠ Still Subject To
- Exchange registration if matching orders
- BD rules if transaction-based fees
- Potential facilitating liability
- State securities laws
Safe Design Principles for NFT Projects
Based on my analysis of enforcement actions and regulatory guidance, I advise NFT projects to follow these design principles to minimize securities risk:
Emphasize Consumptive Use
- Design genuine utility that buyers want to use, not just hold
- Focus marketing on what holders can DO, not what they'll EARN
- Create community experiences, not investment opportunities
- Ensure value proposition doesn't depend on resale
Avoid Profit-Sharing Language
⚠ Language to Avoid
Never use terms like: "investment," "returns," "passive income," "floor price guarantee," "profit sharing," "dividends," "yield," "staking rewards" (for non-utility tokens), "get in early," or "don't miss out on gains."
Limit Secondary Market Royalties
While royalties aren't inherently problematic, I advise caution:
- Keep royalties modest (under 5% is more defensible)
- Don't emphasize royalties as a buyer benefit
- Consider making royalties optional
- Avoid language suggesting holders benefit from trading volume
Decouple Utility from Investment Features
If offering both utility and financial features, I recommend separating them:
- Art/access NFT separate from any revenue-sharing token
- Governance rights without treasury claims
- Memberships without appreciation promises
Fractionalization Deep Dive
F-NFT Platforms as Securities Offerings
When a high-value NFT is fractionalized into tradeable shares, I treat this as a securities offering requiring registration or an exemption. The analysis is straightforward:
- Investment of money: Buyers pay for fraction shares
- Common enterprise: All fraction holders share in the NFT's fate
- Expectation of profits: Primary purpose is speculation/appreciation
- Efforts of others: Platform/curator manages and markets the NFT
Regulation D and Reg A+ Requirements
F-NFT projects seeking compliance typically must choose between:
| Exemption | Requirements | F-NFT Suitability |
|---|---|---|
| Reg D 506(b) | Accredited investors only, no general solicitation | Difficult - limits marketing |
| Reg D 506(c) | Accredited investors, can advertise | Possible for high-value fractions |
| Reg A+ Tier 2 | SEC qualification, $75M annual cap | Costly but allows retail |
| Reg CF | $5M cap, through registered portal | Limited by raise size |
Transfer Restrictions
Compliant F-NFT offerings typically require:
- Lock-up periods for initial purchasers
- Restricted legends on tokens
- Trading only on registered platforms
- Verification of accredited status for Reg D
Secondary Trading Limitations
Even with a valid exemption for the primary sale, secondary trading of F-NFT fractions is constrained:
- Rule 144 holding periods may apply
- Trading venues must be registered (exchanges, ATSs, or broker-dealers)
- Current F-NFT marketplaces likely lack required registrations
International Regulatory Approaches
UK Financial Conduct Authority (FCA)
The FCA has stated that most NFTs are unlikely to be "specified investments" under UK law, but makes important distinctions:
- Art/collectible NFTs: Generally unregulated
- NFTs providing rights to investments: Potentially regulated
- NFT fractions: Likely regulated as collective investment schemes
- Exchange tokens wrapped as NFTs: May be cryptoassets requiring registration
EU Markets in Crypto-Assets (MiCA)
MiCA, effective 2024-2025, includes an NFT carve-out but with significant limitations:
💡 MiCA NFT Exception
"Unique and not fungible" crypto-assets are excluded from MiCA. However, issuing NFTs in a "large series or collection" may suggest fungibility and trigger regulation. Fractionalized NFTs are explicitly NOT exempt.
Singapore MAS Guidance
The Monetary Authority of Singapore (MAS) applies a substance-over-form analysis similar to the US:
- NFTs representing securities (shares, bonds) are regulated as capital markets products
- Pure utility/collectible NFTs generally unregulated
- Payment NFTs may require licensing
- MAS has not issued NFT-specific guidance, applies existing frameworks
| Jurisdiction | Art/Collectible NFTs | Fractionalized NFTs | Revenue-Share NFTs |
|---|---|---|---|
| United States | Generally unregulated | Likely securities | Likely securities |
| United Kingdom | Generally unregulated | Potentially CIS | Case-by-case |
| European Union | MiCA exempt if unique | Subject to MiCA | Case-by-case |
| Singapore | Generally unregulated | Likely regulated | Likely CMS product |
Practical Compliance Checklist
I recommend NFT project founders work through this checklist before launch:
Pre-Launch Securities Analysis
- Engage securities counsel for Howey analysis
- Document the consumptive use case for your NFT
- Review all marketing materials for investment language
- Analyze tokenomics for securities characteristics
- Assess whether fractionalization is contemplated
- Evaluate secondary royalty structure
- Consider jurisdiction-specific requirements
Marketing & Communications
- Remove all "investment" and "profit" language
- Don't discuss floor prices or appreciation potential
- Focus messaging on utility, community, art
- Add clear risk disclosures about potential value loss
- Brief team members on compliant communications
- Monitor Discord/social for problematic statements
Structural Decisions
- Separate utility tokens from any investment features
- Avoid passive income mechanisms (staking for rewards)
- If revenue sharing needed, consider Reg D structure
- Document governance as non-financial
- Consider phased decentralization timeline
Ongoing Compliance
- Monitor SEC and state enforcement developments
- Reassess if adding new features or utilities
- Keep records of legal analysis and decisions
- Consider D&O insurance for founders
- Prepare for potential regulatory inquiries
✅ Bottom Line
The safest NFT projects are those designed from the start with compliance in mind. Retrofitting securities compliance onto an existing project is far more difficult and expensive than building it right the first time. When in doubt, get a formal legal opinion before launch.