On-chain revenue distribution transforms a collectible into a security. When a project like Bored Ape Yacht Club uses a smart contract to split royalties or profits from secondary sales to holders, it creates an expectation of profit from the efforts of others.
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Why Some NFTs Will Inevitably Be Deemed Securities
A technical and legal analysis of why NFT projects promising returns, shared revenue, or fractionalization are on a collision course with the SEC's Howey Test, based on existing enforcement actions and on-chain mechanics.
introduction
THE INEVITABLE RECKONING
Introduction
The technical architecture of certain NFT projects creates an inescapable legal reality under the Howey Test.
Centralized roadmaps and utility promises are a legal trap. The SEC's case against Impact Theory's 'Founder's Keys' established that a team's promotional roadmap for future ecosystem development is the 'common enterprise' required for a security.
Fractionalization protocols like Uniswap V3 accelerate this classification. Pooling NFTs into fungible ERC-20 tokens on a public DEX creates a tradable asset whose value is explicitly derived from the underlying project's success.
Evidence: The SEC's 2023 action against Stoner Cats 2 LLC confirmed that selling NFTs to fund production, with the promise of exclusive content, constitutes an investment contract.
key-trends
HOWEY'S GHOST IN THE MACHINE
The Slippery Slope: Three Trends Leading to SEC Action
The SEC's 'investment contract' test is being triggered by modern NFT mechanics that create explicit profit expectations from a common enterprise.
01
The Royalty-For-Profit Model
Projects like Yuga Labs (BAYC) and Art Blocks established a blueprint where the core value proposition includes a perpetual revenue share from secondary sales. This creates a direct financial dependency on the issuer's ongoing curation and brand-building efforts, mirroring a dividend stream.
- Key Indicator: Enforced creator royalties via centralized marketplace blocklists.
- Legal Hook: Investor expectation of profits is tied to the managerial efforts of Yuga Labs.
2.5%-10%
Royalty Rate
~$3B+
Royalties Paid
02
The Staking & Tokenization Play
NFTs that grant access to staking pools for a native token (e.g., Moonbirds' $TRIBE, PROOF Collective) explicitly convert a collectible into an income-generating asset. The SEC views this as a clear profit expectation derived from the issuer's ecosystem.
- Key Indicator: Native token airdrops and yield mechanisms locked to NFT ownership.
- Legal Hook: The 'common enterprise' is the protocol; profits come from its success.
10-100%+
APY Offered
Mandatory
Holder Lock-in
03
The Roadmap-as-Prospectus
Aggressive, utility-focused roadmaps from projects like Dapper Labs (NBA Top Shot) promise future games, metaverse land, and exclusive perks. This shifts the purchase from aesthetic to speculative investment based on the promoter's execution.
- Key Indicator: Marketing emphasizing future utility over present artistic value.
- Legal Hook: The Howey Test's fourth prong: profits expected solely from efforts of others.
90%+
Of Marketing
Vaporware
Common Outcome
thesis-statement
THE LEGAL REALITY
The Inevitable Howey Test Failure
NFTs marketed with explicit profit promises and centralized managerial efforts will be classified as securities, triggering SEC enforcement.
Profit Expectation from Others' Efforts is the Howey Test's core. Projects like Bored Ape Yacht Club (BAYC) and Dapper Labs' NBA Top Shot created ecosystems where token value was explicitly tied to the issuer's promotional work. The SEC's case against Dapper established that a centralized corporate entity driving value is a hallmark of an investment contract.
The 'Common Enterprise' Threshold is low. Even decentralized-seeming projects fail this prong. If a project's treasury, roadmap, and marketing are controlled by a core team—common in PFP collections and gaming NFTs—the collective fate of buyers is linked. This creates the legal 'horizontal commonality' the SEC requires, regardless of on-chain mechanics.
Utility is not a legal shield. Adding staking rewards or vague 'membership' perks, as seen with Yuga Labs' ApeCoin distribution, often reinforces the investment case. The SEC views these as profit distributions, not consumption. True utility—like an in-game sword—must be inseparable from its use, not a speculative wrapper.
Evidence: The SEC's 2023 complaint against Impact Theory, a media company selling 'Founder's Keys' NFTs, is the blueprint. The agency cited the company's public statements promising value appreciation and its active role in building the ecosystem as definitive proof of a securities offering. This precedent applies to any project with a similar promotional playbook.
THE HOWEY TEST APPLIED
SEC Enforcement Precedent: The Blueprint for NFT Actions
A comparative analysis of NFT project characteristics against SEC enforcement actions for digital assets, illustrating the legal risk spectrum.
| Howey Test Factor / Project Characteristic | High-Risk Profile (Likely Security) | Moderate-Risk Profile (Regulatory Gray Area) | Low-Risk Profile (Likely Not a Security) |
|---|---|---|---|
Primary Use Case & Promises | Explicit profit promise from project efforts (e.g., staking yields, revenue share) | Implied future utility or speculative value tied to roadmap | Pure artistic/collectible expression with no financial promise |
Marketing & Communications | Heavy emphasis on price action, ROI, and "building the ecosystem" | Mixed messaging: some utility talk, some community speculation | Focus solely on art, culture, and creator community |
Centralized Development & Roadmap | Core team controls all development, upgrades, and treasury with a defined, promised roadmap | Decentralized development but with influential founding team and public roadmap | Art is complete at mint; no ongoing development or promises from a central entity |
Dependence on Managerial Efforts | Investor profits are inextricably linked to the ongoing work of the founding team | Value is partially dependent on community and partially on core contributors | Asset value is based on subjective artistic merit, independent of creator's future work |
Fractionalization & Trading Hubs | Official fractionalization tools and promotion on regulated securities platforms | Community-led fractionalization without official endorsement | No fractionalization; traded primarily on NFT-native marketplaces (e.g., Blur, OpenSea) |
SEC Enforcement Precedent | Similar to LBRY Credits (SEC v. LBRY) and certain ICOs: fundraise for project development | Analogous to early Ethereum ICO debate: utility exists but speculation is primary | Aligned with non-fungible collectibles (e.g., NBA Top Shot initially not charged as security) |
Expected Regulatory Outcome | Cease-and-desist order, registration requirement, or settlement (e.g., Impact Theory, Stoner Cats) | Wells Notice or ongoing investigation, potential for settlement | No action letter or explicit exclusion from enforcement (currently hypothetical for NFTs) |
deep-dive
THE SECURITIES TEST
Deconstructing the High-Risk NFT Models
Specific NFT models structurally replicate financial instruments, making them primary targets for securities regulation.
Fractionalized ownership models like Fractional.art or NFTX create fungible tokens representing claims on an underlying asset. This transforms a unique NFT into a common enterprise where profit expectation is derived from a promoter's efforts, a core tenet of the Howey Test.
Royalty-bearing revenue streams are the most direct path to a security designation. Projects like Yuga Labs' BAYC and Moonbirds promised future utility and ecosystem rewards, establishing an investment contract where the asset's value is tied to the issuer's managerial work.
Evidence: The SEC's case against Impact Theory established that promotional statements about building 'the next Disney' created a reasonable expectation of profits, setting a precedent for future roadmap promises.
case-study
THE HOWEY TEST IN ACTION
Case Studies: Projects in the Crosshairs
The SEC's framework is not theoretical. These archetypes demonstrate why certain NFT models are structurally vulnerable to securities classification.
01
The Fractionalized Blue-Chip
Splitting a high-value NFT like a CryptoPunk into fungible ERC-20 tokens creates a textbook investment contract. The Howey Test's "common enterprise" and "expectation of profit from others' efforts" prongs are triggered.
- Profit Reliance: Value is tied to the managing DAO or platform's curation and marketing.
- Passive Income: Some models promise revenue shares from licensing or staking yields.
- Regulatory Precedent: The SEC's case against Fractional set a clear warning.
ERC-20
Token Standard
DAO-Led
Governance
02
The Creator Royalty Fund
Projects like Yuga Labs' Bored Ape Yacht Club face scrutiny not for the JPEGs, but for the ecosystem built around them. The SEC argues the continuous development of ApeCoin, games, and IP licensing creates an ongoing expectation of profit from the issuer's managerial efforts.
- Post-Sale Promises: Roadmaps and ecosystem development are explicit promises of future utility.
- Centralized Curation: Value is demonstrably linked to Yuga's exclusive, centralized execution.
- Secondary Market: The ~$2B+ peak market cap was driven by speculative trading on these promises.
$2B+
Peak Market Cap
ApeCoin
Ecosystem Token
03
The Membership & Utility NFT
NFTs granting access to real-world goods, services, or exclusive communities (e.g., Flyfish Club) are high-risk. The promise of future restaurant access or curated experiences frames the NFT as a prepayment for services, blurring into an investment contract if the primary motive is resale profit.
- Profit Expectation: Secondary sales often far exceed any plausible utility value.
- Managerial Effort: Value is inextricably linked to the issuer's ability to deliver the promised experience.
- Legal Gray Area: These sit at the dangerous intersection of securities, commodities, and club memberships.
IRL Goods
Utility Type
High Risk
SEC Classification
04
The Generative Art Collective
Even art-focused projects like Art Blocks face risk vectors. While individual drops may be safe, the platform's curation, artist selection, and secondary market promotion create a common enterprise. Collectors buy with the expectation that the platform's brand and curation will drive secondary market appreciation.
- Curation as Effort: The platform's selective minting process is a value-add activity.
- Secondary Liquidity: The integrated marketplace fosters a primary focus on trading, not ownership.
- Community Speculation: Discord and Twitter are rife with price talk, undermining "art for art's sake" defenses.
Curated
Mint Model
Platform Risk
Exposure
counter-argument
THE LEGAL REALITY
The Flawed Defense: "But It's a Collectible!"
The Howey Test's economic reality principle renders the 'collectible' label irrelevant for many NFT projects.
The Howey Test Prevails. The SEC's framework focuses on the economic reality of an asset, not its marketing label. If buyers expect profits from the managerial efforts of a core team, the asset is a security. The Bored Ape Yacht Club ecosystem, with its roadmap, ApeCoin governance, and exclusive commercial rights, creates this exact expectation.
Utility Creates Investment Contract. Projects like Yuga Labs' Otherside metaverse land sales compound the issue. Purchasing a digital plot for future gameplay or development is a capital investment in a common enterprise, not acquiring a passive collectible. This mirrors the logic used against initial coin offerings (ICOs).
Evidence: The SEC's Enforcement. The SEC's case against Impact Theory established precedent. The company sold NFTs while promising to 'build the brand' and increase value, which the SEC deemed an unregistered securities offering. This directly targets the 'roadmap promise' model endemic to PFP projects.
FREQUENTLY ASKED QUESTIONS
FAQ: Builder & Investor Implications
Common questions about the legal and technical implications of NFTs being classified as securities.
An NFT is deemed a security if it passes the Howey Test, primarily by offering an expectation of profit from the efforts of others. This applies to projects like Bored Ape Yacht Club where the team's active management, branding, and roadmap drive value, not just the digital art itself. The SEC's actions against Impact Theory and Stoner Cats set this precedent.
takeaways
SECURITY TOKEN REALITY
TL;DR for Busy Builders
The SEC's enforcement against NFT projects like Stoner Cats and Impact Theory signals a new era. Here's the technical and legal logic that will classify certain NFTs as securities.
01
The Howey Test's Digital Enforcer
The SEC applies the Howey Test to NFTs, focusing on the expectation of profits from a common enterprise. This isn't about art; it's about financial packaging.\n- Key Factor: Promises of future utility, roadmap execution, or buyback programs.\n- Precedent: Stoner Cats and Impact Theory set the template: marketing creates the 'investment contract.'
2/4
Howey Prongs Met
$M
Settlement Scale
02
The Centralized Roadmap Trap
Projects that centralize future development and value accrual are painting a target on themselves. A developer treasury funding a promised ecosystem is a 'common enterprise.'\n- Red Flag: Token-gated access to future products, games, or meta-verses controlled by the team.\n- Solution: Fully formed art at mint or decentralized, permissionless development post-launch (e.g., Nouns DAO).
100%
Team Control Risk
DAO-led
Safe Path
03
Royalty Enforcement as a Security
Aggressive, centralized royalty enforcement mechanisms can be construed as a profit-sharing scheme. If the core value prop is a cut of all future trades, it looks like a dividend.\n- Evidence: Creator fees promoted as a key investment return.\n- Trend: Market shift to optional royalties (e.g., Blur, OpenSea) undermines this model and its security-like claims.
5-10%
Typical Royalty
~0%
Market Trend
04
Fractionalization & Pooled Liquidity
Fractionalizing a blue-chip NFT (e.g., via Fractional.art or NFTX) and offering shares directly triggers the Howey Test. It's the digital equivalent of subdividing real estate.\n- Mechanism: Pooling assets to sell divisible tokens representing ownership.\n- Outcome: Creates a clear 'common enterprise' with an expectation of profit derived from others' efforts.
ERC-20
Fraction Token
High
SEC Scrutiny
05
The Utility Token Mirage
Attaching vague 'utility' to an NFT (e.g., future game, access to a Discord) is the most common mistake. If the utility's value is speculative and unproven, the primary motive for purchase is investment.\n- Trap: Roadmap V1 promises vs. immediate, consumable utility.\n- Benchmark: Compare to a concert ticket—value is in the imminent experience, not resale.
90%+
Projects at Risk
T=0
Utility Start Time
06
The PFP Community as a Security
Profile Picture projects (e.g., BAYC) with exclusive clubs, commercial rights, and token airdrops walk a fine line. The community's value is often the team's curated, ongoing effort.\n- Danger Zone: Airdrops of new tokens (e.g., APE) to NFT holders can be seen as a profit distribution.\n- Defense: Rapid decentralization of IP and brand, ceding control to a DAO.
IP Rights
Key Asset
DAO
Exit Strategy
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Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall