When the popularity of non-fungible tokens (NFTs) took off last year, most assumed that collectibles could never be securities. Given the regulatory compliance involved in issuing securities, such classification should be avoided unless intentional and desirable. Therefore, the characteristics of an NFT must be carefully considered before launch.

It was quickly realized that if NFTs are fractionated, the fractions begin to look like fungible tokens. And those fractions of a token could very well be a collective investment or a security.

As NFTs have evolved, so have their features. If an NFT gives you an interest in some income or income, then that NFT is also potentially a security.

The Reed Smith attorneys state that if income is offered, it is the passive type of income that should be avoided. Instead, he suggests that if the token holder does some activity on the token’s native platform and the revenue aspect is compensation, then that could be considered a quid pro quo and not a security.

However, he does refer to participation and governance rights as examples of what might be right.

Today, SEC Commissioner Hester Peirce suggested to the Financial Times that participating in governance could also count towards a securities rating. If she takes a step back and thinks about how companies work, shareholders tend to vote on governance to determine the direction of the so-called “common company.”

So the top three things to avoid are fracturing an NFT, offering income, or engaging in governance.

Peirce has not always agreed with SEC Chairman Gary Gensler. While Gensler thinks it is clear which fungible tokens are securities, not everyone agrees. Peirce suggested to the Financial Times that NFTs could be an area where the SEC should provide some guidance.