OpenSea, a leading marketplace for NFT collections, trading and sales reported today that they had received a Wells Notice from the US Securities and Exchanges Commission (SEC). A Wells Notice is a kind of "show cause" document used where the SEC has conducted an investigation and may commence a prosecution and is saying to the recipient "tell us why we shouldn't sue you".
The continued regulation by enforcement approach of the SEC was noted by OpenSea, who said:
for those who have been following the political and regulatory landscape around crypto more closely, the reaction is more one of weariness and disappointment. Cryptocurrencies have long been in the crosshairs of the SEC. But, by targeting NFTs, the SEC is diving into new, uncharted waters, with potentially harmful consequences for consumers, creators, and entrepreneurs alike
This Wells Notice follows popular songwriters Jonathan Mann and Brian L. Frye suing the SEC to try and ensure their One Song A Day NFTs will not be labeled securities under US law:
Mann and Frye promptly made their song for today about OpenSea to continue their protest against regulatory overreach.
Respected Web3 figure Adam Cochran ran an interesting thought experiment, suggesting OpenSea should respond with an action for mandamus, an ancient action asking a court to compel the government to do something to fulfil their proper function, in this case, if OpenSea is to be sued, that all other operators of collectible marketplaces be investigated and sued:
While others poured cold water on the legal issues and likelihood of success of such a strategy, it draws attention to the double standard of non-blockchain digital assets, like Pokemon digital cards and other collectibles, long being considered (rightly) not any kind of security, even if people have purchased them with a hope of making a return.
Others pointed out the illogic in this approach.
Rodrigo from Paradigm was particularly brutal:
And Congressman Wiley Nickel (R) said:
The aggressive use of "regulation by enforcement" from @SECGov is a blatant abuse of power that erodes trust and transparency in our regulatory system.
OpenSea has also stepped up and pledged a USD$5M fund to cover legal fees for any artists who also receive a Wells Notice. It's worth noting that even if the NFTs on open sea are securities, there is no current practical way under US law for them to be issued and sold, so it would seem preferable policy for resources to be directed to engagement and rule-making to put reasonable protections in place for consumers (if needed), and prevent inefficient regulation-by-enforcement of crypto-businesses.
Despite the apparent aggression from the regulator, OpenSea remains open in their approach, saying:
We hope that the SEC will reconsider its stance and approach this issue with the open-mindedness it deserves.
The sooner openminded collaborative approaches to crypto-regulation set in, to give users the products they want with reasonable protections from bad actors, the better the outcomes will be for the whole industry and consumers.
By Michael Bacina
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