The wave of hype around non-fungible tokens (NFT) has passed, but the technology has remained.
The concept allows you to secure ownership of digital and physical constructs, so some companies are trying to implement it. In particular, for the tokenization of real world objects.
NFTs are not only used in business. For example, in 2022, a British court approved the service of claim documents in the form of non-fungible tokens. Later this practice adopted and in other jurisdictions.
At the same time, the question remains open – if there has been a tokenization of contractual relations and obligations of the real world, are NFTs investment objects? Indeed, in this case, these tokens are subject to regulations governing the circulation of securities, impose liability on issuers and become subject to regulators like the SEC.
Especially for Cryplogger, Yulia Privalova, Director of the DRC Legal Department, told whether the purchase of a non-fungible token can be considered an investment.
What is the Howie test?
To determine whether NFTs fall within the definition of a uncertificated security, it is proposed to use the so-called Howey test (Howey Test).
This test was developed by the U.S. Supreme Court in 1946 in the Securities and Exchange Commission v. Howie (SEC v. WJ Howey Co.). The participants in the process needed to understand whether the contract for the sale of land plots with subsequent leasing is an investment contract (security).
During the meeting, it was established that the buyers never planned to live or work on the acquired land. Instead, they entered into deals to generate income from the cultivation of citrus trees by the Howey Co. That is, they expected to receive a profit from their investments.
Howey test applied to NFT
American lawyers have adapted the Howey test in relation to the projects of the cryptocurrency market. To understand whether an NFT is a security, it is proposed to establish the compliance of the asset with a number of criteria.
Investment of money. This condition is almost always met, since NFTs are usually purchased for a certain fee.
Having a joint venture with a reasonable expectation of profit. This point is more applicable to fractional NFTs, since the value of each share in such a token depends entirely on the value of the remaining parts and the whole asset.
Regarding the expectation of profit, the US Supreme Court ruled in the case United Housing Foundation Inc. v. Forman:
“[…] when the buyer is guided by the desire to use or consume the purchased product […] securities laws do not apply.”
Thus, the way the NFT is used is an important factor.
The profit must come from the efforts of a certain third party. This condition is rather applicable to NFT collections. The promotion of the entire set of tokens by marketers, producers and agents affects the value of each asset individually.
Arbitrage practice
There is a lot of controversy on this issue and a large number of ambiguous court decisions.
For example, in February 2023, the Federal District Court for the Southern District of New York decidedthat Dapper Labs, through the NBA Top Shots Twitter account, gave “investment advice” through the publication of emoji, and the tokens of the NFT collection of the same name are unregistered securities.
The court documents say:
“Although the word ‘profit’ is not included in any of the tweets, the ‘rocket’, ‘stock charts’ and ‘bags of money’ emoji all objectively mean one thing: financial return on investment.”
What NFTs can be considered securities?
The DRC believes that in order to properly classify NFTs, a distinction should be made between digital art and tokenized real-world objects.
If we consider NFT as a work of art, then the latter can grow in value and make a profit like stocks. However, if the transaction involves the transfer of rights to work, and the seller does not mention the possibility of increasing the value of the asset, it is unlikely to be a security.
However, fractional NFTs will be considered as a security, as well as tokens, upon the sale of which the seller promises any income, for example, in the form of royalties, profits or dividends.
***
The versatility of non-fungible tokens provides a variety of possibilities for their use. These assets can be used to tokenize just about anything, from plane tickets to court notices.
The NFT sector is still too young for a large number of court precedents to be created and clear regulation to be introduced.
Therefore, for the correct classification of this or that NFT, DRC specialists recommend that project teams contact qualified lawyers at the initial stage of development. According to them, this will secure the product and make it more attractive to investors.
Found a mistake in the text? Select it and press CTRL+ENTER
Cryplogger Newsletters: Keep your finger on the pulse of the bitcoin industry!
The wave of hype around non-fungible tokens (NFT) has passed, but the technology has remained.
The concept allows you to secure ownership of digital and physical constructs, so some companies are trying to implement it. In particular, for the tokenization of real world objects.
NFTs are not only used in business. For example, in 2022, a British court approved the service of claim documents in the form of non-fungible tokens. Later this practice adopted and in other jurisdictions.
At the same time, the question remains open – if there has been a tokenization of contractual relations and obligations of the real world, are NFTs investment objects? Indeed, in this case, these tokens are subject to regulations governing the circulation of securities, impose liability on issuers and become subject to regulators like the SEC.
Especially for Cryplogger, Yulia Privalova, Director of the DRC Legal Department, told whether the purchase of a non-fungible token can be considered an investment.
What is the Howie test?
To determine whether NFTs fall within the definition of a uncertificated security, it is proposed to use the so-called Howey test (Howey Test).
This test was developed by the U.S. Supreme Court in 1946 in the Securities and Exchange Commission v. Howie (SEC v. WJ Howey Co.). The participants in the process needed to understand whether the contract for the sale of land plots with subsequent leasing is an investment contract (security).
During the meeting, it was established that the buyers never planned to live or work on the acquired land. Instead, they entered into deals to generate income from the cultivation of citrus trees by the Howey Co. That is, they expected to receive a profit from their investments.
Howey test applied to NFT
American lawyers have adapted the Howey test in relation to the projects of the cryptocurrency market. To understand whether an NFT is a security, it is proposed to establish the compliance of the asset with a number of criteria.
Investment of money. This condition is almost always met, since NFTs are usually purchased for a certain fee.
Having a joint venture with a reasonable expectation of profit. This point is more applicable to fractional NFTs, since the value of each share in such a token depends entirely on the value of the remaining parts and the whole asset.
Regarding the expectation of profit, the US Supreme Court ruled in the case United Housing Foundation Inc. v. Forman:
“[…] when the buyer is guided by the desire to use or consume the purchased product […] securities laws do not apply.”
Thus, the way the NFT is used is an important factor.
The profit must come from the efforts of a certain third party. This condition is rather applicable to NFT collections. The promotion of the entire set of tokens by marketers, producers and agents affects the value of each asset individually.
Arbitrage practice
There is a lot of controversy on this issue and a large number of ambiguous court decisions.
For example, in February 2023, the Federal District Court for the Southern District of New York decidedthat Dapper Labs, through the NBA Top Shots Twitter account, gave “investment advice” through the publication of emoji, and the tokens of the NFT collection of the same name are unregistered securities.
The court documents say:
“Although the word ‘profit’ is not included in any of the tweets, the ‘rocket’, ‘stock charts’ and ‘bags of money’ emoji all objectively mean one thing: financial return on investment.”
What NFTs can be considered securities?
The DRC believes that in order to properly classify NFTs, a distinction should be made between digital art and tokenized real-world objects.
If we consider NFT as a work of art, then the latter can grow in value and make a profit like stocks. However, if the transaction involves the transfer of rights to work, and the seller does not mention the possibility of increasing the value of the asset, it is unlikely to be a security.
However, fractional NFTs will be considered as a security, as well as tokens, upon the sale of which the seller promises any income, for example, in the form of royalties, profits or dividends.
***
The versatility of non-fungible tokens provides a variety of possibilities for their use. These assets can be used to tokenize just about anything, from plane tickets to court notices.
The NFT sector is still too young for a large number of court precedents to be created and clear regulation to be introduced.
Therefore, for the correct classification of this or that NFT, DRC specialists recommend that project teams contact qualified lawyers at the initial stage of development. According to them, this will secure the product and make it more attractive to investors.
Found a mistake in the text? Select it and press CTRL+ENTER
Cryplogger Newsletters: Keep your finger on the pulse of the bitcoin industry!
