Crypto Startups Should Be Allowed to Raise Money With NFTs, Says SEC Leadership

SEC Crypto Task Force lead Hester Peirce said Friday that crypto projects like Stoner Cats— which used NFTs as a fundraising mechanism to fund their work—should be exempt from securities regulations, and may soon receive that clarity from the powerful regulator.

Backstage at the SEC’s first ever crypto roundtable Friday afternoon, Peirce—who along with Acting SEC Chair Mark Uyeda now leads the SEC’s efforts following Gary Gensler’s resignation—told Decrypt she’s been heartened by positive responses to a statement the agency issued yesterday declaring proof-of-work crypto mining to not fall under its definition of securities. Peirce said NFTs could be the next asset category the agency addresses with a similar exemptive statement.

“We could do it on NFTs as well,” Peirce said. “If we could provide some kind of framework or some kind of markers for [NFT issuers] to look to, I think it could be pretty helpful.”

NFTs are digital tokens that exist on blockchain networks such as Ethereum and Solana. They’re typically linked to digital art and are bought and sold on secondary marketplaces as tradeable assets. The market for NFTs peaked in late 2021, rising to as much as $25 billion at the height of the mania, with enterprising crypto entrepreneurs making use of these tokens to raise billions for various ventures.

The commissioner went on to elaborate that a statement regarding the non-security status of certain kinds of NFTs could carve out art NFTs, as well as NFTs that resemble Fly Fish Club and Stoner Cats—two projects sued by the SEC under the leadership of former chair Gary Gensler.

Stoner Cats, an animated series produced by the actress Mila Kunis, raised some $8 million, via the sale of NFTs, to fund the show. The NFTs offered holders certain perks, including access to view the series, but were also tradable on secondary markets. Each secondary market transaction provided the Stoner Cats team with a 2.5% royalty—meaning a percentage of each sale went to the team behind the project as revenue.

In a similar situation, Fly Fish Club raised over $14 million, via NFT sales, to fund the construction of a members-only private restaurant. The NFTs, which offered holders membership to the restaurant, were also resellable on secondary markets with a similar royalty structure in place.

Should the SEC soon issue a statement regarding such NFTs, similar to statements it has issued in recent weeks about proof-of-work crypto mining and meme coins, the proclamation would effectively signal open season for projects that utilize tradable NFTs with perks as a means to fundraise.

That doesn’t mean, though, that if a project were to feature NFTs it would therefore be exempt from securities regulations, Peirce emphasized Friday.

“You could have an NFT that’s a tokenized security, and it could be structured as an NFT,” she said. “Obviously that’s not going to be carved out.”

A similar push to protect certain fundraising activity through the sale of NFTs is currently underway in Congress. As crypto-related legislation begins to make its way through the House and Senate, some lawmakers have advocated to include language in those bills that would legalize the sale of NFTs offering perks like memberships, merchandise, or artwork.

Source