Yesterday Bloomberg reported that the US Securities and Exchange Commission (SEC) is probing some non-fungible token (NFT) issuances to see whether they are securities offerings, citing un-named sources. It has sent out subpoenas to some issuers.
It’s thought the SEC’s primary interest is fractional NFTs, which might be considered similar to issuances of securities. In other words an NFT represents only partial ownership of an object.
Commissioner Hester Peirce, the crypto-friendly SEC Commissioner nick-named CryptoMom, has previously spoken about the topic. She noted that plain vanilla NFT collectibles that don’t have revenue potential are unlikely to fall foul of regulations.
However, she warned that issuers should be careful about creating fractional ownership of NFTs, which could be perceived as a security. We’re guessing that’s because there’s a collective investment.
Several NFT funds have emerged, and if those issue tokens, it would be considered a security. Some projects in the sports sector may or may not fall foul of these issues.
For example, Dibbs is a marketplace that buys expensive physical sports collectibles and then sells NFTs that represent fractional ownership. It attracted funding from Amazon.
Apart from fractional investments, there’s also the potential to earn revenues. Typically stocks earn dividends and some NFTs offer explicit returns. Many of those NFTs were issued before people fully appreciated the legal risks.
One question is whether in-kind “rewards” might be considered as revenues. That could be very problematic because many NFTs have a reward element. Owning an NFT often provides a discount on purchasing further NFTs.
It’s more likely the SEC will focus on straightforward infringements. Because moving into loyalty and rewards could get messy.
On the other hand, NFTs are attracting the SEC’s attention because the market has exploded and is an area that’s becoming more mainstream. Another SEC focus area is crypto lending and BlockFi recently reached a settlement with the regulator.