The US Securities Exchange Commission (SEC) is gearing up to go after non-fungible token (NFT) creators and marketplaces that violate its regulations. A report unveiled this news earlier today, citing people familiar with the matter. Specifically, the regulator launched a probe into whether creators and marketplaces are using digital collectibles to raise funds like traditional securities.
According to the report, attorneys in the SEC’s enforcement unit sent out multiple subpoenas over the past months, demanding information about NFT offerings. The sources, who requested to remain anonymous, further disclosed that the watchdog is focusing on fractional NFTs, which involve breaking down the tokens into units that can be easily bought and sold.
Explaining why the regulator has developed an interest in the NFT industry, Hester Pierce, the SEC’s most crypto friendly commissioner, previously said,
Given the breadth of the NFT landscape, certain pieces of it might fall within our jurisdiction. People need to be thinking about potential places where NFTs might run into the securities regulatory regime.
Some NFT players have already initiated efforts to avoid regulatory scrutiny
Hester believes people should beware of fractional NFTs, seeing as the subsector is rapidly growing and might fall under the regulatory scope of the SEC if deemed unregistered securities.
To check whether an asset is a security, the regulator uses the Howey Test. This framework brings assets under the SEC’s regulatory remit if they involve investors injecting money into a company with hopes to profit from the decisions the organization’s leadership makes.
While the SEC’s requests for information do not always lead to enforcement actions, some NFT marketplaces have already introduced policies that prevent the listing of NFTs that might see them attract regulatory scrutiny.
An example is FTX NFTs, which said it would not list projects that offer holders royalties from secondary market sales. FTX US President Brett Harrison said royalty-like reward schemes make such NFTs act like securities.
While Solana-based NFT project Meerkat Millionaires Country Club criticized FTX for failing to defend the legitimacy of NFTs and current innovations, others like Turtles, Solarians, and Toasty Turts changed courses. According to Harrison, such projects made these changes because they learned of the potential regulatory risks.
