In recent years, the world of trading cards has experienced a resurgence, with collectors and investors alike clamoring for these coveted pieces of sports and entertainment history.
As the market booms, it's clear that similar to crypto and hot stocks, they are being purchased, traded, held as investments, and sold at a premium just like stocks.
To understand the debate, it's crucial to first define what constitutes a security. According to the U.S. Securities and Exchange Commission (SEC), a security is an investment contract in which an individual invests money in a common enterprise with an expectation of profits primarily from the efforts of others. This definition is at the core of the debate surrounding trading cards.
The Howie Test
The landmark case of SEC v. W.J. Howey Co. established the Howey Test, which has become the standard for determining whether an asset qualifies as a security. According to this test, an investment is considered a security if it involves:
- An investment of money
- In a common enterprise
- With an expectation of profits
- Primarily from the efforts of others
Applying the Howey Test to Trading Cards
When applying the Howey Test to trading cards, we can break down each element:
1. Investment of Money:
Collectors purchase trading cards, often at a premium, with the expectation that their value will appreciate over time. This aligns with the first prong of the Howey Test, but there's a caveat with the method in which trading cards are usually obtained. They are typically purchased blindly in randomized packs with most purchasers expecting to lose most and get lucky with a big "hit" than actually gaining anything on their average card which makes them more akin to scratch-off lottery tickets than stocks.
2. Common Enterprise:
The trading card market functions as a collective market, where the value of cards is influenced by various factors, including demand, rarity, and market trends. This indicates a common enterprise.
3. Expectation of Profits:
Many collectors view trading cards as an investment, hoping that the cards will appreciate in value, thereby yielding a profit. Do the trading cards exploit this expectation? They surely do, by issuing rare, elite, and exclusive collectibles and actively participating in the market and price influences even going so far as market manipulation. This satisfies the third prong.
4. Efforts of Others:
This prong is where the debate intensifies. Critics argue that a card's value is primarily influenced by external factors such as player performance, team success, and market trends, rather than the efforts of a specific entity. A trading card's value is highly tied to the overall success of an athlete, the awards and championships won, their longevity, and factors that aren't predictible. Is it luck? Is it skill?
While trading cards do meet certain criteria of the Howey Test, the fourth prong remains a subject of contention. The argument can be made that the efforts of others, namely players, teams, and market influencers, play a significant role in determining a card's value. However, this isn't easy to predict.
Trading cards purchases align very closely with placing bets on players, and investing in an outcome not necessarily investing in each individual card. Most investors place a bet on their guy, and hold hoping his success increases the value of the card which the investor is able to sell for a return, or hold for bragging rights.
As the market continues to grow, regulators may reevaluate the criteria for determining securities. Until then, collectors and investors should approach trading cards with a comprehensive understanding of the market and its legal implications.