Israeli SEC Issues new guidelines; NFTs may be deemed as securities.

in #nft3 years ago

TL;DR: No, the Israeli SEC did not specifically address NFTs in its recent memorandum about public offerings; however, it did address situations which may be considered securities. One of those is a case where rental units or other forms of real-estate are sold alongside a profit-sharing agreement. This, according to the Israeli SEC, is to be deemed as securities that apply the Howey test because they are issued in a series of non-negotiable agreements and pricing is not based on personal bargaining.

The long story: The Israeli Securities Authority (ISA, SEC equivalent) has issued a memorandum on public offerings (Hebrew, here ). This memorandum addresses various investment mechanisms that were offered to the Israeli public. These include real-estate offerings which became quite popular. In these schemes, a person was offered to purchase a real-estate unit in a development project, and had to sign a management agreement that promised some kind of return as a rent, included a buy-back clause and an extension clause.

The ISA found that because these agreements did not actually allow bargaining on the price of the real-estate unit, and because they were sold alongside the lease to the development company that promised some sort of interest and shifted risk, the Howey test of whether this is a security was met and these sorts of arrangements are to be considered a security.

The ISA reasoned that "all investors are subject to the same real-estate property and are affected in an identical manner from the developer's financial stability, the building's situation and the developer's ability to comply with the ongoing payments. In respect to all of this, the investors share the same risks and business risks that derive from the developer's business activity and the performance of all units as a whole".

Quick reminder on the Howey test, this is a test created by the US Supreme Court to address whether something is indeed a "security" and subject to securities laws; it requires: (i) investment of funds; (ii) in a common enterprise; (iii) with an expectation of profit; (iv) derived from the efforts of others.

How does this apply to NFTS? NFTs, or Non-Fungible Tokens, are a tool meant to create unique assets over a blockchain. Currently, however, they are mostly used for allocation of artworks and allowing them to be sold on a secondary market. Meaning, that if I issue an NFT of a bored ape, each image's "ownership" (not really, btw) is sold over the blockchain. When the person who bought the image wants to resell it, the original author is again compensated by the sale.

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This includes several elements:

Most NFTs are issued in a series; while not all NFTs are identical in form and value, it seems like they are issued in a series; the "Bored Apes" issued 10,000 units, where each unit has some value.

The value of one NFT is affected by the values of others; meaning, that if my Bored Ape rises in value, it also increases the value of another Bored Ape, even if not in an identical form.

The value of the NFTs is based on the endeavors of the original developer. Quite a lot of the value comes from the original marketing and press relations. Meaning, that when a person buys an NFT they expect the original developer to market them and increase their value, so that their work would rise in value as well. This is that same reasoning as buying a Picasso. While not all Picasso paintings are identical in value, the sale of one in a public auction may cause an increase in value to the others.

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So what should you do? If you're planning an NFT, you need to make sure you're not failing (or passing, if you prefer to see it that way) the Howey test. You need to make sure that each of your works would be deemed as independent and separate from each other, and that their value and profit would not be derive from anything but the endeavor of the persons who hold them. You need to plan your smart contract to ensure that such test would not apply to your series and get professional advice. Don't rely on some stranger's writing on the internet.