A non-fungible token (“NFT”) is “an encrypted unit of data stored on a digital ledger,” the ledger typically being Ethereum blockchain. Each NFT is a unique digital asset, unlike cryptocurrencies which are “fungible.” In the early days of blockchain technology, NFTs were used primarily to represent ownership of artistic works like paintings or digital images. A person can own a verifiably unique NFT that indicates to the rest of the world that the person also owns a particular artwork.
However, businesses have been seeking to use NFTs as more than just representations of artwork ownership. Companies are now using NFT ownership as an access key to benefits and perks associated with the company. For example, LinksDAO uses NFTs as membership cards to its affiliated golf courses. These new iterations of NFTs are sometimes referred to as “utility NFTs,” NFTs that carry utility beyond the satisfaction of just owning an artwork.
While NFTs in their original form appear to be non-security investments, utility NFTs look more like securities under U.S. caselaw. Indeed, many utility NFTs seem to satisfy the Howey Test, the legal framework used by judges to determine whether a financial instrument is an investment contract under the Securities Act of 1933.
II. Utility NFTs
Utility NFTs have become a popular way of extending the use of NFTs into business and entrepreneurship. Developers of utility NFTs use these digital assets to deliver a network of benefits to the NFT holder. With the purchase of a utility NFT the owner in effect also purchases the right to certain “perks,” such as entrance to speaker events featuring celebrities, ownership of virtual assets for videogames, or access to golf courses and exclusive merchandise.
In a regulatory landscape that was already muddled, utility NFTs present further difficulties for governments as they seek to regulate security-like investments. While NFTs related to artwork seem more like a paintings than securities, utility NFTs maintain much closer ties to the original business enterprise. If an investor buys an NFT that holds an array of perks, that investor is holding an asset that will depreciate or appreciate depending on the success of the enterprise with which the NFT is associated. If this NFT can be resold, it begins to look like an investment subject to risks like those stocks are subject to and thus appears to fall within the jurisdiction of the Securities and Exchange Commission (“SEC”).
III. The Howey Test
In SEC v. W. J. Howey Co., the Supreme Court established the test that governs whether a financial instrument is an investment contract, which would make that instrument a security regulated by the SEC. The Howey Test has three elements: 1) an investment of money 2) in a common enterprise 3) with the expectations of profit derived from the efforts of others. Purchasing an NFT satisfies the first prong of the Howey Test because the NFT “is purchased or otherwise acquired in exchange for value.”
A. Common Enterprise
The common enterprise element has been interpreted differently between circuits. All circuits have accepted “horizontal commonality,” while some accept “vertical commonality” as well.
Horizontal commonality requires that investors pool their money into an enterprise, thereby tying their fortunes to the fortunes of the other investors. Ownership of a digital artwork would not satisfy horizontal commonality because other investors are not pooling their money into the same enterprise—each NFT is unique in its value and the profit gained on the NFT is independent from the profit gained on a different NFT from the same company. However, if these NFTs are utility NFTs released in the same series and holding the same perks, then they begin to look more like common enterprises. For example, if everyone who owns an NFT from a particular series gets the perks of speaking with the owner of the company once a month, gaining access to exclusive training material, and receiving the right to partner with the company later, the NFTs no longer look like unique artworks, but like identical—or at least practically identical—rights of access. The profits of each investor will rise and fall together with the success of the enterprise as a whole because the value of the shared perks is tied to the success of the business.
Some circuits also accept vertical commonality as satisfying the commonality prong of the Howey Test. Vertical commonality is satisfied when the fortunes of the investor are tied to the fortunes (strict vertical commonality) or efforts (broad vertical commonality) of the promoter of the enterprise. Once again, a simple NFT appears to fail this requirement because once an NFT is sold, the ties between the NFT seller and the NFT buyer end. However, utility NFTs maintain a connection between the NFT creators and the buyers. Using the example from the paragraph above, the value of an NFT with partnership rights clearly depends on the efforts of the promoter of the enterprise, because a successful promoter will make the partnership rights more desirable. Additionally, the profit of the NFT owner will be tied to the profit of the promoter of the enterprise. If the enterprise fails, both promoter and investor lose. If the enterprise succeeds, then both do as well.
B. Expectations of Profits from the Efforts of Others
The Strategic Hub for Innovation and Financial Technology of the SEC has explained that “the main issue in analyzing a digital asset under the Howey test is whether a purchaser has a reasonable expectation of profits (or other financial returns) derived from the efforts of others.”
While a series of factors are relevant to the inquiry in this element, the crux of the issue is whether the investors rely on someone else to increase the value of their investment to gain profit. Similar to the vertical commonality analysis, the fact that owners of utility NFTs will see the value of their NFT increase as the promoter of an enterprise succeeds in promotion makes it likely that this element would be satisfied.
Businesses issuing utility NFTs may be subject to securities regulation. When a company issues a series of utility NFTs and ownership of those NFTs includes perk and benefits tied to the business, those utility NFTs may satisfy the Howey Test and thus be considered investment contracts under the Securities Act of 1933.
 Brian L. Frye, How to Sell NFTs Without Really Trying, 13 Harv. J. Sp. & Ent. L. 113 (2022).
 See Nicole Silver, The History and Future of NFTs, Forbes (Nov. 8, 2022), https://www.forbes.com/sites/nicolesilver/2021/11/02/the-history-and-future-of-nfts/?sh=6b50628b6a16.
 LinksDAO, https://linksdao.io/ (last visited Nov. 10, 2022).
 See, e.g., Utility NFTs Take on the Market, Bitcoinist (Nov. 8, 2022), https://bitcoinist.com/utility-nfts-take-on-the-market/; All About Utility NFTs, the Unique Tokens with Practical Applications, Binance: Binance Blog (Nov. 8, 2022), https://www.binance.com/en/blog/nft/all-about-utility-nfts-the-unique-tokens-with-practical-applications-897687675250973294.
 See Frye, supra note 1 at 118.
SEC v. W. J. Howey Co., 328 U.S. 293, 298-99 (1946).
 See Tom Brady 2022 Season Ticket NFT Terms & Conditions, Autograph (Nov. 8. 2022), https://terms.autograph.io/TB2022SeasonTicket.pdf (“It is Autograph’s expectation that the End-Of-Season Event will be attended by Tom Brady and there will be some interaction between Tom Brady and attendees.”).
 See Introducing the Fractal NFT, Fractal (Nov. 8, 2022), https://nft.fractal.is/ (“Very soon, you will be able to use Fractal Wallet containing the NFT to unlock in-game benefits with our Metagame partner games.”).
 LinksDAO, supra note 4.
 See Frye, supra note 1 at 117-18.
 W. J. Howey Co., 328 U.S. at 298 (1946).
 Id. at 299.
 SEC Strategic Hub for Innovation and Financial Technology, Framework For ‘Investment Contract’ Analysis of Digital Assets, https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.
 Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994).
 Founders Key, https://founderskey.io/ (last visited Nov. 8, 2022).
 Revak, 18 F.3d at 87 (2d Cir. 1994).
 Id. at 87-88.
 Supra note 14.
 Id (“When a promoter, sponsor, or other third party (or affiliated group of third parties) (each, an "Active Participant" or "AP") provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, then this prong of the test is met.”).