Synopsis
OpenSea, one of the most prominent NFT marketplace in the world, has asked the Securities and Exchange Commission (SEC) for clarity on NFT marketplace regulations. OpenSea’s legal team sent a letter to Hester Peirce, who is in charge of the SEC’s crypto task force. OpenSea argues that the NFT platforms do not operate like traditional exchanges so they need to be evicted from the federal securities law. The official request follows the regulating authority closing its investigation into OpenSea in February.
OpenSea Seeks For Clarity On NFT Market Regulations!
OpenSea, the leading non-fungible token (NFT) marketplace formally requested a clear explanation from the SEC on the existing NFT marketplace regulations. They have requested to evict NFT marketplaces from the securities exchange and broker regulations. OpenSea’s legal team including Adele Faure and Laura Brookover officially sent a formal request to Hester Peirce on April 9th. The formal request was put forward by OpenSea right after the SEC dropped its investigation into the company for allegedly breaching the federal securities law.
In the letter sent by the OpenSea officials, they noted at the outset that NFTs are not considered securities under the Exchange Act. They explained that, among other reasons, most NFTs are collectibles or art, purchased primarily for consumption, novelty, or aesthetic value rather than for investment. They added that this point aligns with the dissenting statement concerning the Stoner Cats enforcement action, which stated that the Commission must take care to preserve the ability of artists to sell their work, build a fan base, and involve that fan base in future creative endeavors.
In the submission put forward by Adele Faure and Laura Brookover, they address why NFT marketplaces like OpenSea are neither exchanges nor brokers under the Securities Exchange Act of 1934 (Exchange Act), and propose what steps the commission should take to confirm the non-regulated status of NFT marketplaces.
NFT Marketplaces Cannot Qualify As An Exchange; Says OpenSea Authorities.
OpenSea addresses the NFT marketplace as a ‘digital bazaar’ and opines the platforms function in different styles and cannot be classified under traditional exchanges. They claim that the platform just allows users to discover NFTs and act as a bridge between buyers and sellers rather than acting as an exchange by facilitating trades in the conventional sense. The legal team of OpenSea stated that to qualify as an exchange, a marketplace must have multiple sellers. They clarified that, as proposed in Rule 3b-16, marketplaces do not meet the “multiple sellers” requirement if they have multiple sellers, but only one seller for each instrument. They emphasized that the requirement of multiple sellers presumes that the asset being traded is fungible, meaning it is interchangeable with identical items. They noted that if the token is unique, there is only one possible seller: the current owner. Therefore, they concluded that an NFT marketplace, which showcases unique digital items, cannot qualify as an exchange.
“OpenSea Does Not Act As A Broker For Many Of The Reasons”
In the letter sent on April 9, OpenSea says that it does not act as a broker either, the reasons they state to emphasize this point are, that NFT marketplaces like OpenSea passively display information, including NFT listings, offers, and transfer history, without soliciting investments or providing trading advice. They noted that they assist buyers and sellers in making offers and engaging directly with one another, while the transactions themselves are conducted peer-to-peer, with users sending transaction instructions via their self-custodied wallets to the blockchain for execution. The letter emphasized that marketplaces like OpenSea merely provide an interface for users to explore NFTs. It was mentioned that users have custody of their own assets in third-party wallets and that through these wallets, they initiate NFT transactions. At no point did OpenSea claim to control or hold users’ NFT assets, and they clarified that they do not engage in any other services traditionally associated with brokering.
The letter ends with a request to clarify the confusion regarding the position of NFT marketplaces like OpenSea under federal securities law. “As a next step, we ask the SEC to clear the existing industry confusion on this issue by
publishing informal guidance. In the longer term, we invite the Commission to exempt NFT marketplaces like OpenSea from proposed broker regulation under Section 15(a) of the Exchange Act,” the letter concludes by raising their concern and request.
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