Although the excitement for non-fungible tokens (NFTs) may have faded since its peak in 2022, [1] the world’s largest NFT marketplace, OpenSea, has new and unwanted attention from the SEC. In addition to a potential enforcement action by regulators, OpenSea is now facing a putative class action prompted by the SEC’s efforts to regulate digital assets as securities.

This is not the first time the SEC has targeted NFT projects for alleged violations of securities laws. Last year, two high-profile NFT projects settled enforcement actions with the SEC – Impact Theory, LLC [2] and Stoner Cats [3] – without admitting or denying the SEC’s findings that the NFTs at issue constituted digital asset securities that were offered and sold in violation of securities laws. In a press release announcing the Stoner Cats settlement, the SEC’s Director of Enforcement stated “[r]egardless of whether your offering involves beavers, chinchillas, or animal-based NFTs, under the federal securities laws, it’s the economic reality of the offering – not the labels you put on it or the underlying objects – that guides the determination of what’s an investment contract and therefore a security.” [4] However, two SEC Commissioners strongly dissented from the treatment of these NFTs as digital asset securities, [5] and the SEC’s position remains untested in court. That could quickly change.

On Aug. 28, 2024, OpenSea announced that it “recently received a Wells notice” from the SEC, alleging that NFTs on OpenSea’s platform are unregistered securities. [6] OpenSea equated these developments as another improper “regulation-by-enforcement-only” by the SEC, and pledged $5 million to cover legal fees for NFT artists and developers who receive a Wells notice. [7] Wells notice recipients typically have 30 days to respond to the SEC, so it’s possible that – even if the SEC intends to move forward with an enforcement action against OpenSea or its creators [8] – we will not see an enforcement action before the imminent end of the US federal government’s fiscal year.

However, the disclosure of the Wells notice may have exposed OpenSea to legal challenges beyond those threatened by the SEC. On Sept. 19, two users of OpenSea filed a proposed class action against the NFT marketplace in the Southern District of Florida, alleging that the NFTs exchanged on OpenSea are unregistered securities. [9] In support of their allegations, the Plaintiffs in the Florida action point to several recent developments in crypto litigation, as well as the SEC’s settlement of the Impact Theory and Stoner Cats matters. They also cite the recent Wells notice received by OpenSea as a basis for their lawsuit.

These challenges for OpenSea are still in the earliest stages of litigation, and the Florida court sua sponte raised questions as to whether it had subject matter jurisdiction over the lawsuit. [10] But if the case against OpenSea proceeds, it’s worth noting that another federal judge in the Southern District of Florida recently allowed claims related to Shaquille O’Neal’s promotion of NFTs to proceed to discovery. [11] And, of course, the SEC is no stranger to litigation with the crypto industry, so another lawsuit against OpenSea may be coming along with new threats to developers of NFTs.

[1] After reaching a peak trading volume of $17 billion in January 2022, the interest in trading NFTs has plummeted, with commentators observing at least a 97% drop in trading volume. See, e.g.,The Rise and Fall of NFTs: What Happened and What’s Next? CoinMarketCap, available at https://coinmarketcap.com/academy/article/8728797c-3d26-4864-ad19-b35ba777fc81.
[2] SEC Charges LA-Based Media and Entertainment Co. Impact Theory for Unregistered Offering of NFTs, SEC (Aug. 28, 2023), available at https://www.sec.gov/newsroom/press-releases/2023-163.
[3] SEC Charges Creator of Stoner Cats Web Series for Unregistered Offering of NFTs, SEC (Sept. 13, 2023) available at https://www.sec.gov/newsroom/press-releases/2023-178.
[4] Id.
[5] Collecting Enforcement Actions: Statement on Stoner Cats 2, LLC, Commissioners Hester Peirce & Mark Uyeda (Sept. 13, 2023), available at https://www.sec.gov/newsroom/speeches-statements/peirce-uyeda-statement-stonercats-091323.
[6] Taking a stand for a better internet, Devin Finzer, OpenSea (Aug. 28, 2024) available at https://opensea.io/blog/articles/taking-a-stand-for-a-better-internet.
[7] Id.
[8] The SEC has reportedly abandoned other high-profile enforcement probes this year, such as its investigation into Ethereum 2.0. See, e.g., SEC Closes Ethereum 2.0 Investigation, Will Not Pursue Ethereum Enforcement Action, Consensys (June 18, 2024), available at https://consensys.io/blog/sec-closes-ethereum-2-0-investigation-will-not-pursue-ethereum-enforcement.
[9] Shnayderman, et al. v. Ozone Networks, Inc. (d/b/a OpenSea), S.D. Fl. Case No. 1:24-CV-23616-CMA (Complaint Filed Sept. 19, 2024).
[10] Id. Dkt. No. 4 (Sept. 20, 2024).
[11] See Harper, et al. v. O’Neal, et al., S.D. Fl. Case No. 1:23-CV-21912-FAM, Dkt. No. 91 (Aug. 16, 2024).