Nifty NFTs Are Unregistered Securities, Class Action Alleges [UPDATE]

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A proposed class action alleges non-fungible tokens (NFTs) sold on a platform operated by Nifty Gateway and The Gemini Trust Company are in fact unregistered securities under federal law. 

The 30-page complaint says that the NFTs sold on the Nifty Gateway platform, known as “nifties,” are online certificates of ownership that focus on digital artwork and curated collections. Per the suit, nifties are securities given investors buy the blockchain-based assets with the hope that their value will increase in the future as the project’s popularity grows. 

The case contends that the defendants, as issuers of NFTs, were required to file registration statements with the U.S. Securities and Exchange Commission (SEC), in part to ensure that retail investors without technical or financial sophistication are given enough information to evaluate the risks. 

“Defendants knew of these requirements, but nonetheless failed to comply,” the suit alleges. “By selling these unregistered securities to investors, Defendants reaped hundreds of millions of dollars in profits.” 

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Per the case, Nifty Gateway is one of the top marketplaces to buy, sell, trade and own NFTs. Users are told that they can buy, sell and collect the assets while avoiding expensive gas fees—i.e., transaction fees charged for the cost of powering the blockchain—that can rack up due to the complexity and demand at the time of a transaction, the suit relays. 

According to the filing, the Nifty Gateway platform and the Gemini Trust Company, the cryptocurrency exchange founded by the billionaire Winklevoss twins, present nifties as if they are unique works of art and compare their business model to art galleries. However, this is deceptive, the lawsuit alleges, in that a single NFT “can be recreated en mass as many times as desired.” In truth, the only thing that’s “unique” about an NFT is the code and data used to record the asset, the suit specifies. 

“Despite Defendants’ continued attempts to present their product in a different light, it remains functionally identical to other crypto assets and most importantly, as a result, functions as a security in the same manner in which consumers invest,” the lawsuit argues. 

At the most basic level, the suit explains, a security, such as a stock, bond, option, mutual fund or ETF, is a financial asset that has value and can be bought, sold or traded. Broadly, securities are interests that represent rights in something else of value, the case states. 

The lawsuit says that nifties are in fact securities because they constitute investment contracts under a definition set by a 1946 Supreme Court decision. 

“Nifties are an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” the complaint summarizes. “Furthermore, the circumstances surrounding the creation of Nifty digital assets and the manner in which they are offered, sold, and/or resold to investors are what makes Nifties securities under the law.” 

The lawsuit looks to cover all persons who bought or otherwise acquired nifties within the relevant statutory period. 

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