Source: Cointelegraph
Original: “SEC Commissioner Peirce Clearly States: NFT Royalty Mechanism Does Not Constitute Securities Attribute Determination”
SEC Commissioner Hester Peirce stated that many non-fungible tokens (NFTs), including those with mechanisms for paying creator royalties, are likely not within the regulatory scope of federal securities laws.
In a recent speech, Peirce indicated that NFTs allowing artists to earn resale income would not automatically be classified as securities. Unlike stocks, NFTs are programmable assets that can allocate revenue to developers or artists. The SEC official noted that this model is similar to how streaming platforms compensate musicians and filmmakers.
"Just as streaming platforms pay creators royalties each time a user plays a song or video, NFTs can allow artists to benefit from the appreciation in value after the initial sale of their work," Peirce stated.
Peirce further emphasized that this feature does not provide NFT owners with any business enterprise rights or profit interests traditionally associated with securities.
Oscar Franklin Tan, Chief Legal Officer of Atlas Development Services, a core contributor to Enjin, revealed to Cointelegraph that Peirce's recent comments on NFTs and creator royalties have been widely misunderstood.
Peirce clarified that NFTs that pay resale royalties to artists are not necessarily securities, and Tan believes this viewpoint is legally sound but has been severely misrepresented in some media reports.
"Peirce stated that an NFT that returns royalties to creators after a sale is not a security. This is correct, but the way certain media reported it was completely out of context," Tan told Cointelegraph. "In fact, this has never been a controversial viewpoint; NFT royalties have never been considered securities."
The seasoned lawyer explained that the core of U.S. securities law is to regulate investment behavior, not to provide compensation mechanisms for creators' work.
"Artists or creators are not investors; they are not passive third parties in NFTs," he pointed out, emphasizing that royalty income is not considered investment income.
Tan further elaborated to Cointelegraph that such income is "essentially similar to business revenue," and the SEC does not regulate this type of income. He added:
"The SEC has never prohibited contracts that allow artists and creators to earn royalties from secondary sales of their works, whether through paper contracts or blockchain protocol royalties."
Tan detailed that when NFTs promise to share royalty profits with multiple holders beyond the original creators, the legal definitions become more complex.
Tan also urged regulators and market participants to apply traditional legal thinking to the emerging blockchain technology space. "One should ask themselves, if this were done with pen and paper instead of blockchain, would there still be regulatory issues?" he suggested. "If the answer is no, then regulatory efforts should be slowed down."
Source: Oscar Franklin Tan
While the issue of NFT royalties may not fall within the SEC's controversial scope, NFT trading platforms face a different situation. In August 2024, the NFT trading platform OpenSea received a Wells notice from the SEC, alleging that the NFTs traded on the platform may constitute unregistered securities.
On February 22, OpenSea CEO Devin Finzer announced that the SEC had officially terminated its investigation into the platform. The executive stated that this outcome is a victory for the entire industry.
After the SEC investigation concluded, OpenSea's legal team submitted a letter to Peirce, who leads the SEC's cryptocurrency special working group. OpenSea's General Counsel Adele Faure and Deputy General Counsel Laura Brookover emphasized in a letter dated April 9 that NFT trading platforms do not meet the definition of a broker under U.S. securities law.
These legal experts pointed out that trading platforms neither execute trades nor act as intermediaries. They urged the SEC to "clearly state that NFT trading platforms like OpenSea do not fall under the category of exchanges as defined by federal securities law."
Related: South Korea Tightens Cryptocurrency Rules Before Institutional Market Entry
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