The SEC has, in rapid fire, announced enforcements against two NFT projects for allegedly violating securities laws. The first action announced August 28, 2023 was against Impact Theory and the second action announced September 13, 2023 was against Stoner Cats. In both cases, two SEC Commissioners dissented. The SEC has taken these actions despite not first offering specific guidance on the applicability of securities law to NFTs. While these actions have come as a surprise to many in the NFT industry, we have been cautioning NFT projects about these issues for some time. And in our NFT Regulatory Issues – a 2022 Review and 2023 Preview, we commented:

• Despite the minimal regulatory enforcement actions against blockchain game companies and NFT issuers, now is NOT the time to become complacent about regulatory issues…many U.S. agencies are increasing their focus on regulatory enforcements in the crypto space and NFTs are no exception.
• Despite written requests, the SEC has not issued specific guidance on the applicability of securities laws to NFTs. In the interim, the general guidance in its Framework for “Investment Contract” Analysis of Digital Assets should be considered to assess whether an NFT offering implicates securities laws, especially where NFTs are used in place of traditional fundraising.
• Some scenarios where this may occur include fractionalization, presales of NFTs where a game is not yet built and attaching certain revenue rights to ownership of NFTs.
• However, the determination in each case will be highly fact specific. The SEC has reportedly sent subpoenas related to the investigation of NFTs and is particularly interested in information about fractional NFTs. For more on that see here.
• The SEC has announced a near doubling of its staff to focus on enforcements of crypto assets including NFTs.

For more information on the Impact Theory action see The SEC’s Sudden Impact on NFTs!

Often, especially where an NFT just represents a single entities ownership of a unique, digital asset and no other rights or entitlements, issuing NFTs will not likely invoke securities laws. With other fact patterns, including some mentioned above, a more careful analysis is warranted. This is an area that requires careful legal evaluation and varies from project to project based on the specific facts.

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