In two landmark NFT enforcement actions, securities regulators in Texas and Alabama have ordered a Cyprus-based online casino developer and its founders to shut down and discontinue NFTs allegedly marketed and sold as securities. Dated April 13, 2022, the Texas Command alleges that the company and its co-founders tendered 11,111 NFTs in an unregistered and fraudulent securities offering to raise funds to operate virtual casinos in a metaverse. The Alabama Securities Commission, with help from the Kentucky Department of Financial Institutions, simultaneously issued a similar injunction against the company and its founders.
According to a statement from the Texas State Securities Board, the company and its founders marketed their NFTs — which they called “Gambler” and “Golden Gambler” — as investment opportunities and promised potential buyers a share of the proceeds. casino, which brings in up to $81,000 per year. The statement further alleges that the company told potential buyers that its NFTs were not regulated as securities because the securities laws did not apply to NFTs.
The company reportedly plans to use some of the proceeds from its NFT sales to buy “land” to operate virtual casinos on platforms such as Decentraland, Sandbox, Infinity Void, and NFT Worlds, which are metaverse platforms. Metaverse casinos work like real casinos, except in virtual worlds. Using virtual reality avatars, customers can enter metaverse casinos and play casino games using cryptocurrencies. Authorities in Texas and Alabama claimed that marketing materials promised owners of NFT Gambler and Golden Gambler that they would receive monthly payouts based on the profitability of Metaverse casinos.
The Texas order alleges that the Gambler and Golden Gambler NFTs are securities under Texas securities laws and should have been registered before being offered to the public. The injunction further alleges that the company misled the public by making false and fraudulent statements about these products. This is the first time securities regulators have issued stop-and-desist orders in relation to an NFT offering for a platform in a metaverse, but it probably won’t be the last. The Texas State Securities Board says it has identified other securities offerings on metaverse platforms and is coordinating with other states to investigate and potentially pursue enforcement action.
Four takeaway meals
- State securities regulators in Texas and Alabama have targeted NFTs that are allegedly marketed and sold as securities offerings. They actively monitor all types of digital assets for unregistered and fraudulent securities offerings. Other state securities regulators are likely to follow suit against companies operating in a metaverse that fail to comply with state securities laws.
- US state and federal securities laws may apply to non-US companies. Products on distributed ledgers and metaverse platforms are easily accessible to people around the world, highlighting the global regulatory risks of companies doing business in this space.
- While most NFTs that are popular in the market do not currently have any features that make them securities under United States federal or state law, depending on the rights attached to them and the way they are traded, they may be structured as offerings of effects.
- Companies operating in this area must engage qualified legal counsel to review their products and marketing plans to advise them on the risks.