SEC’s Peirce says NFT royalties do not make tokens securities

SEC Commissioner Hester Peirce clarified that many NFTs, including those with royalty mechanisms for creators, likely fall outside federal securities laws. Her statement emphasizes that the ability of artists to earn resale revenue doesn’t automatically classify an NFT as a security. Unlike stocks, NFTs are programmable assets distributing proceeds to creators, similar to how streaming platforms compensate musicians. This distribution, Peirce argues, doesn’t grant NFT owners rights or interests traditionally associated with securities.

This perspective, while legally sound according to Enjin’s chief legal officer, Oscar Franklin Tan, has been misinterpreted in some media reports. Tan clarifies that the SEC has never prohibited contracts granting artists royalties from secondary sales, regardless of whether the contracts are on paper or blockchain. The focus of US securities law, Tan explains, is on regulating investments, not creator compensation. Royalty payments are viewed as business income, not investment income, and are therefore not subject to SEC regulation.

However, the legal landscape becomes more complex when NFTs promise shared profits from royalties to multiple holders beyond the original creator. Tan advises regulators and market participants to apply traditional legal reasoning to new blockchain technologies, suggesting a “pen and paper” test to determine if a regulatory issue would exist without blockchain’s involvement.

While NFT royalties might not be a contentious SEC issue, NFT marketplaces present a different scenario. OpenSea, a major NFT trading platform, received a Wells notice from the SEC alleging that NFTs traded on its platform could be unregistered securities. However, the SEC recently closed its investigation into OpenSea, a development OpenSea’s CEO called a win for the industry.

OpenSea’s legal team subsequently urged the SEC to explicitly state that NFT marketplaces do not qualify as exchanges under federal securities laws, arguing that they don’t execute transactions or act as intermediaries. The differing viewpoints on NFTs and marketplaces highlight the evolving regulatory landscape surrounding digital assets.