Are digital assets considered securities? With the U.S. Securities and Exchange Commission (SEC) not having provided a definition or framework yet, the answer remains elusive. A pending lawsuit may help with a solution.
A class action suit filed on April 25, 2025, accuses footwear giant Nike of a "soft rug pull" by shutting down a non-fungible token (NFT) company they had acquired a few years ago. With the SEC still holding meetings to determine how they'll view NFTs, the court may have to decide if the Howey Test applies.
This Time It's Sneakers, Not Apes
Unlike hard currency, each NFT is intended to be unique and carry a distinct value. NFTs are commonly perceived as online art, but can also serve as admission tickets, proof of membership in a group, and other usages. Because there's no physical product or federal regulation in place (beyond taxes) as of April 2025, "pump and dump" schemes often find fertile ground with NFTs.
In 2021, NFTs were hugely popular and seemed poised to establish a bustling commodity market for digital images. Athletic shoe and sports apparel behemoth Nike decided to join the market that year by purchasing RTFKT, a well-respected studio in the crypto world known for generating attention and sales.
Projects like CloneX and Cryptokicks were huge successes, and those who bought in were told that Nike planned additional gamified services like quests and entrance into early drops of new NFTs that would also enable real-world rewards. The promised addition of peer-to-peer trading and a value-adding ecosystem would serve to increase the worth of Nike's NFTs.
Nike's RTFKT resided on the Ethereum blockchain, one of the most popular cryptocurrencies. It's noted for its adaptability for different types of NFTs. The NTFs were available for purchase at OpenSea, a popular online marketplace.
For a while, the Nike NFTs were wildly successful. Those who purchased and then sold them through RTFKT often saw large returns on their investments.
Swooshing Away With the Profits
As the NFT market began to cool, Nike's interest in the project also chilled. On December 2, 2024, RTFTK announced it would wind down operations and expected to be shuttered by the end of January 2025. As might be expected, the news caused the value of the Nike NFTs to nosedive. To date, they have shown no sign of recovering lost value.
In crypto parlance, "pulling the rug" happens when the creator and/or the promoters of a project take the assets, leaving behind investors with NFTs reduced in value or even worthless. The class action lawsuit, headed by plaintiff Jagdeep Cheema, accuses Nike of a "soft rug pull," in which the project is promoted as if no end is in sight.
As of the date of the filing of Cheema's lawsuit, the SEC's Crypto Task Force, established by the Trump administration, had yet to establish a regulatory framework regarding cryptocurrencies and NFTs. The filing invokes the Howey Test as proof that Nike was dealing in unregistered securities.
Resulting from a U.S. Supreme Court ruling, the Howey test uses the following four conditions to determine if a transaction is an investment contract:
- It is an investment of money (later ruled to include other assets)
- There is an expectation of profits from the investment
- The investment of money/assets is in a common enterprise
- Any profit comes from the efforts of a promoter or third-party
Arguing that Nike controlled and manipulated the value of its NFTs, the plaintiffs allege that the company caused them significant damages by not including pertinent information about their securities. They hedged their bet by charging that if the court doesn't agree that the Nike NFTs are securities, Nike is guilty of deceptive acts and unfair trade under laws in four states (New York, California, Florida, and Oregon).
The plaintiffs have demanded a jury trial and are seeking unspecified damages. Whether they were victims of a crypto rug pull or just angry investors upset over lost money is up to a jury.
Related Resources
- What You Need To Know About Online Scamming and the Law (FindLaw's Criminal Charges)
- Is Online Art a Security? The Debate over NTFs (FindLaw's Federal Courts)
- Learn About Digital Assets and Cryptocurrency (FindLaw's Estate Planning Basics Resources)
