SEC’s Peirce: NFT Royalties Don’t Classify Tokens as Securities

Commissioner Hester Peirce of the United States Securities and Exchange Commission (SEC) has indicated that many non-fungible tokens (NFTs), including those featuring mechanisms for paying creator royalties, probably fall outside the scope of federal securities regulations.

In a recent speech, Peirce stated that NFTs that enable artists to earn revenue from resales do not automatically categorize as securities. Unlike stocks, NFTs are programmable assets that allocate proceeds to developers or artists, similar to how streaming platforms compensate musicians and filmmakers.

“Just as streaming platforms compensate creators of songs or videos each time a user engages with their content, NFTs can allow artists to benefit from the appreciation of their work’s value after the initial sale,” Peirce remarked.

She further explained that this feature does not provide NFT owners with any rights or interests in business enterprises or profits “traditionally associated with securities.”

SEC has not banned NFT royalties

Oscar Franklin Tan, chief legal officer at Enjin core contributor Atlas Development Services, shared with Cointelegraph that recent comments from Peirce about NFTs and creator royalties have often been misinterpreted.

Peirce clarified that NFTs distributing resale royalties to artists are not necessarily classified as securities, a perspective Tan considers legally valid but misrepresented in several media reports.

“Hester Peirce confirmed that an NFT that sends royalties back to the creator after a sale is not a security. While that is accurate, some media reports have taken this out of context,” Tan informed Cointelegraph. “The actual context indicates that this isn’t a controversial matter and was never regarded as a security.”

The attorney emphasized that U.S. securities law is designed to regulate investments rather than to govern how creators are compensated for their work.

“The artist or creator is not an investor or a passive third party in the NFT,” he stated, explaining that royalty payments do not constitute investment income.

Instead, Tan noted that such earnings are “analogous to business income,” which is not regulated by the SEC. He added:

“The SEC has never prohibited contracts that allow artists and creators to receive royalties from the secondary sales of their work—not from paper contracts or blockchain protocols.”

Tan clarified that the legal distinction becomes more intricate when NFTs promise shared profits from royalties to multiple holders beyond the original creator.

Furthermore, he encouraged regulators and market participants to apply traditional legal concepts to emerging blockchain technologies. “Consider if this were done on paper instead of on the blockchain; would there still be a regulatory concern?” he asked. “If the answer is no, proceed cautiously.”

Source: Oscar Franklin Tan

Related: SEC charges Unicoin crypto platform over alleged $100 million fraud

OpenSea urges the SEC for exemption from oversight for NFT marketplaces

While NFT royalties might not have been a contentious issue for the SEC, NFT marketplaces present a different scenario. In August 2024, NFT trading platform OpenSea received a Wells notice from the SEC, alleging that NFTs traded on the platform could be considered unregistered securities.

On February 22, OpenSea CEO Devin Finzer announced that the SEC had officially closed its investigation into the platform, deeming it a success for the industry.

After the investigation’s conclusion, OpenSea’s legal team wrote to Peirce, who leads the SEC’s Crypto Task Force. OpenSea’s general counsel Adele Faure and deputy general counsel Laura Brookover expressed in an April 9 letter that NFT marketplaces should not be classified as brokers under U.S. securities regulations.

According to the lawyers, these marketplaces do not execute transactions or act as intermediaries. They urged the SEC to “clearly state that NFT marketplaces like OpenSea do not qualify as exchanges under federal securities laws.”

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