Are Royalty-Paying NFTs Securities? SEC Commissioner Peirce Weighs In

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Post on May 22, 2025

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Are Royalty-Paying NFTs Securities? SEC Commissioner Peirce Weighs In

The intersection of non-fungible tokens (NFTs) and securities law is a rapidly evolving landscape, leaving many creators and investors uncertain about the legal implications. A key question fueling this debate: are NFTs that generate ongoing royalties for creators considered securities? Recently, SEC Commissioner Hester Peirce offered her perspective, injecting further complexity into an already nuanced discussion.

The Blurred Lines Between Art and Investment

The rise of NFTs has blurred the lines between digital art and investment vehicles. While many view NFTs as unique digital assets representing ownership of artwork, collectibles, or in-game items, the inclusion of royalty mechanisms—where creators receive a percentage of each subsequent sale—introduces a crucial element: ongoing financial returns. This is where the SEC’s scrutiny comes into play. The Howey Test, a cornerstone of US securities law, defines an investment contract as an investment of money in a common enterprise with a reasonable expectation of profits derived primarily from the efforts of others. Royalty-paying NFTs, with their promise of ongoing income streams, potentially meet this definition.

Commissioner Peirce's Cautious Approach

Commissioner Peirce, known for her relatively crypto-friendly stance within the SEC, has acknowledged the complexities surrounding royalty-paying NFTs. She hasn't explicitly declared them securities, but her statements highlight the need for a careful, case-by-case analysis. Instead of a blanket ruling, she advocates for a nuanced approach that considers the specifics of each NFT project. This includes factors such as:

• The level of involvement of the creator: If the creator is actively involved in the project's ongoing development and success, it might weaken the argument for it being a security.
• The distribution of the NFTs: A wide distribution among holders suggests a lesser reliance on the efforts of the creator.
• The marketing and promotion: If the NFT is marketed primarily as an investment opportunity rather than a piece of art, it increases the likelihood of SEC scrutiny.

The Importance of Compliance

The lack of clear regulatory guidance leaves NFT creators in a precarious position. Failure to comply with securities laws can result in significant penalties. The SEC's focus on investor protection underscores the importance of transparency and full disclosure. This means creators should carefully consider the legal implications before launching an NFT project with a royalty mechanism. Seeking legal counsel specialized in securities law and blockchain technology is crucial to navigate this complex area.

Looking Ahead: The Need for Clarity

The regulatory uncertainty surrounding royalty-paying NFTs creates a significant hurdle for the NFT market's growth and innovation. While Commissioner Peirce’s measured approach is welcomed, the lack of clear guidelines necessitates a more definitive stance from the SEC. A clear framework would provide much-needed certainty for creators and investors alike, fostering responsible innovation within the NFT space and promoting investor confidence. The future of royalty-paying NFTs hinges on achieving a balance between protecting investors and encouraging the continued development of this dynamic technology. The ongoing dialogue between regulators and the NFT community will be pivotal in shaping the future of this rapidly evolving sector.