SEC's Peirce Clarifies NFT Securities Status: Creator Royalties And The Howey Test

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Post on May 22, 2025

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SEC's Peirce Clarifies NFT Securities Status: Creator Royalties and the Howey Test

The Securities and Exchange Commission (SEC) continues to grapple with the burgeoning world of non-fungible tokens (NFTs), and Commissioner Hester Peirce has once again shed light on the agency's approach, specifically addressing creator royalties and the application of the Howey Test. Her recent statements offer crucial clarification for NFT creators, marketplaces, and investors navigating the complex regulatory landscape.

The Howey Test: The Cornerstone of Securities Regulation

At the heart of the SEC's NFT scrutiny lies the Howey Test, a decades-old standard used to determine whether an investment contract qualifies as a security. This test hinges on four key elements:

1. An investment of money: This is relatively straightforward in the NFT context, representing the purchase price of the NFT.
2. In a common enterprise: This element focuses on whether investors share profits or losses based on the collective efforts of others. This is where things get complicated with NFTs, as some projects operate with decentralized governance while others are more centralized.
3. With a reasonable expectation of profits: The expectation of future profits, often derived from appreciation in value or secondary market sales, is key. Many NFTs are purchased with the hope of future price increases.
4. Derived from the efforts of others: This is arguably the most crucial element regarding NFTs. If the value of the NFT depends significantly on the efforts of the developers or a central entity, it's more likely to be classified as a security.

Creator Royalties and the SEC's Perspective

Commissioner Peirce has emphasized that the inclusion of creator royalties in NFT sales does not necessarily automatically transform an NFT into a security. While royalties provide a continuous stream of income for the creator, their presence alone isn't sufficient to meet the Howey Test's criteria. The focus remains on the overall structure of the project and whether the value is primarily driven by the efforts of others.

Distinguishing NFTs from Securities: Key Considerations

Several factors influence whether an NFT is considered a security:

• Level of Decentralization: Highly decentralized projects, where the community plays a significant role and no single entity controls the project's future, are less likely to be deemed securities.
• Role of the Creator: If the creator's involvement is limited to the initial creation and they have no ongoing control over the NFT's value or future development, it weakens the case for it being a security.
• Marketing and Sales: Aggressive marketing promising substantial returns or emphasizing the investment potential of the NFT significantly increases the likelihood of SEC scrutiny.
• Utility and Functionality: NFTs with real-world utility beyond mere speculation (e.g., access to exclusive content, membership benefits) are less likely to fall under securities regulations.

Navigating the Uncertainties: Recommendations for NFT Creators and Marketplaces

The regulatory landscape surrounding NFTs remains fluid. However, based on Commissioner Peirce's statements and existing legal precedents, creators and marketplaces should:

• Prioritize Transparency: Clearly disclose the project's structure, governance model, and the role of the creator.
• Focus on Utility: Develop NFTs with genuine use cases that extend beyond speculation.
• Avoid Promising Returns: Steer clear of marketing materials that explicitly promise investors substantial financial gains.
• Consult Legal Counsel: Seek advice from experienced securities lawyers to navigate the complexities of the Howey Test and ensure compliance.

The SEC's ongoing review of the NFT market highlights the need for clear guidance and responsible innovation. Commissioner Peirce's clarification on creator royalties and the application of the Howey Test offers valuable insight, but the ultimate determination of whether an NFT constitutes a security remains case-specific and necessitates careful consideration of the project's individual characteristics. The future of NFT regulation hinges on a balance between fostering innovation and protecting investors.