The Wells notice that the U.S. Securities and Exchange Commission has sent to NFT marketplace OpenSea has the potential to be “disastrous” for digital asset markets and participants, according to industry sources.
On Wednesday morning, Devin Finzer, OpenSea’s co-founder and CEO, revealed on X that “OpenSea has received a Wells notice from the SEC threatening to sue us because they believe NFTs on our platform are securities. We’re shocked the SEC would make such a sweeping move against creators and artists. But we’re ready to stand up and fight.”
A Wells notice is a warning from the SEC that it is planning on recommending enforcement action against the recipient. The SEC has sent a number of Wells notices to crypto firms this year, including to both Uniswap Labs and Robinhood Crypto.
Read more: How OpenSea’s Weekly NFT Volumes Plummeted From $1 Billion to $20 Million in Just 2 Years
According to J.W. Verret, a crypto law professor at George Mason Law School, the chances of a company convincing the SEC not to bring a case after receiving a Wells notice from the agency were 20% to 30% before Gary Gensler became chairman. But “because it’s Gary Gensler and because it’s crypto, I think no question the SEC is going to bring an action,” Verret told Unchained.
OpenSea is the second-largest NFT marketplace by trading volume behind only Blur, according to a Dune Analytics dashboard created by onchain researcher Hildobby.
SEC Overreach?
Jason Gottlieb, a partner at law firm Morrison and Cohen, said the SEC recommending charges against OpenSea is an attack on secondary market sales of art. This means that artists and galleries would be forced to hire expensive securities lawyers to ensure that artists sell art, not securities, as well as to evaluate whether galleries serve as an unregistered exchanges or broker-dealers under securities laws.
“The impact would be disastrous,” said Gottlieb, who represents “Song-A-Day” artist Jonathan Mann and conceptual artist Brian L. Gyre in their complaint filed last month against the SEC seeking clarity on whether the art they create using NFTs — visual art, music, or videos —will be deemed a digital asset security by the enforcement agency.
OpenSea’s Finzer echoed these concerns, writing his in post that “by targeting NFTs, the SEC would stifle innovation on an even broader scale: hundreds of thousands of online artists and creatives are at risk, and many do not have the resources to defend themselves…we should not regulate digital art in the same way we regulate collateralized debt obligations.”
If the commissioners authorize enforcement action against OpenSea, “it brings the SEC into increasingly ridiculous expansions of its authority, for which it was never intended,” Verret argued. As to why the SEC sent a Wells notice to OpenSea, Verret opined that “NFTs are in the news and Gensler is chasing news headlines.”
In a similar vein, Brian Quintenz, global head of policy at venture capital fund a16z crypto, wrote on X that “News of @OpenSea receiving a Wells notice shows plain and simple that the current SEC’s crusade against the crypto industry continues unabated.”
According to Gottlieb, district court judges have repeatedly ruled that tokens themselves, including NFTs, are not securities. “Even if they were originally packaged as some sort of investment contract, the tokens themselves are not securities,” Gottlieb said. “As a result, trading on secondary markets of these tokens cannot be securities transactions.”
OpenSea’s receiving a Wells notice comes at a time when the NFT marketplace is at a multi-year low in terms of monthly trading volume. According to a Dune Analytics dashboard created by Richard Chen, August saw roughly $35.7 million in trading volume so far, its lowest level since Jan. 2021.
A spokesperson for the SEC declined to comment on the existence or non-existence of a possible enforcement action against OpenSea.
