SEC Commissioner Peirce has clearly stated: The NFT royalty mechanism does not constitute a determination of securities attributes.

Source: Cointelegraph Original text: "SEC Commissioner Peirce clearly stated: The NFT royalty mechanism does not constitute the identification of securities attributes"

SEC Commissioner Hester Peirce stated that many non-fungible tokens (NFTs), including those with a mechanism for paying creator royalties, are likely not within the regulatory scope of federal securities laws.

In a recent speech, Peirce stated that NFTs allowing artists to receive resale income would not automatically be classified as securities. Unlike stocks, NFTs are programmable assets that can allocate revenue to developers or artists. This SEC official pointed out that this model is similar to the compensation methods used by streaming platforms for musicians and filmmakers.

"Just as streaming platforms pay royalties to creators every time users play a song or video, NFTs can allow artists to benefit from the appreciation of their works after the initial sale," Peirce stated.

Peirce further emphasized that this characteristic does not provide NFT owners with any "traditional securities-related" business enterprise rights or profit interests.

Oscar Franklin Tan, the Chief Legal Officer of Atlas Development Services, a core contributor to Enjin, revealed to Cointelegraph that Peirce's recent comments regarding NFTs and creator royalties have been widely misunderstood.

Peirce clarified that paying resale royalties to artists through NFTs does not necessarily classify them as securities. Tan believes this viewpoint is entirely reasonable from a legal perspective, but it has been severely misrepresented in some media reports.

"Pierce stated that an NFT that returns royalties to creators after a sale is not a security. This is correct, but the way it has been reported by some media is completely out of context," Tan told Cointelegraph. "In fact, this has never been a controversial view; NFT royalties have never been considered securities."

The senior lawyer explained that the core of U.S. securities law is to regulate investment behavior, rather than to provide a compensation mechanism 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 this type of income "is essentially similar to business revenue," and the SEC does not regulate such income. He added:

"The SEC has never prohibited contracts that allow artists and creators to receive royalties from the secondary sales of their works, whether it be paper contracts or royalties from blockchain agreements."

Tan explained in detail that when an NFT commits to distributing shared profits from royalties to 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 field of blockchain technology. "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 the regulatory pace should be slowed down."

Source: Oscar Franklin Tan

Although the issue of NFT royalties may not fall within the scope of SEC controversies, NFT trading platforms are facing a different situation. In August 2024, the NFT trading platform OpenSea received a Wells notice ( from the SEC, accusing the NFTs traded on the platform of potentially constituting unregistered securities.

On February 22, OpenSea CEO Devin Finzer announced that the SEC has 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 working group. In the letter dated April 9, OpenSea's General Counsel Adele Faure and Deputy General Counsel Laura Brookover emphasized that the NFT trading platform does not meet the definition of a broker under U.S. securities law.

These legal experts pointed out that trading platforms neither execute trading operations nor act as intermediaries. They urged the SEC to "clearly state that NFT trading platforms like OpenSea do not fall under the definition of exchanges as outlined by federal securities laws."

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