U.S. Securities and Exchange Commission (SEC) Commissioner Peirce made it clear: The NFT royalty mechanism does not constitute a determination of security attributes
SEC Commissioner Hester Peirce said that many NFTs, including those with mechanisms to pay creator royalties, are likely to be outside the scope of federal securities laws.
In a recent speech, Peirce said that NFTs that allow artists to earn resale revenue would not automatically be classified as securities. Unlike stocks, NFTs are programmable assets that can distribute income to developers or artists. The SEC official noted that the model is similar to how streaming platforms compensate musicians and filmmakers.
"Just like streaming platforms pay creators royalties every time a user plays a song or video, NFTs can allow artists to benefit from the appreciation in value of their work after its initial sale," Peirce said.
Peirce further emphasized that this feature does not provide NFT owners with any commercial enterprise rights or profit interests "traditionally associated" with securities.
SEC has never banned NFT royalties
Oscar Franklin Tan, chief legal officer of Enjin core contributor Atlas Development Services, revealed to Cointelegraph that Peirce’s recent remarks about NFTs and creator royalties have been widely misunderstood.
Peirce clarified that NFTs that pay resale royalties to artists are not necessarily securities. Tan believes that this view is completely reasonable in law, but has been seriously misinterpreted in some media reports.
“Pierce said that an NFT that returns royalties to the creator upon sale is not a security, but the way some media reported it was completely out of context,” Tan told Cointelegraph. "Actually, this is not a controversial point at all, 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 and are not passive third parties in NFTs,” he noted, emphasizing that royalties are not considered investment income.
Tan further elaborated to Cointelegraph that this type of income is "essentially similar to business income" and the SEC does not regulate this type of income. He added: "The SEC has never prohibited contracts where artists and creators receive royalties from secondary sales of their works, whether paper contracts or royalties from blockchain protocols."
Tan explained in detail that when NFTs promise to distribute the shared profits of royalties to multiple holders other than the original creator, the legal definition becomes more complicated.
Tan also called on regulators and market participants to apply traditional legal thinking to the emerging blockchain technology field. "You should ask yourself, if this was done with pen and paper instead of blockchain, would there still be regulatory issues?" he suggested: "If the answer is no, then the pace of regulation should be slowed down."
OpenSea calls on the SEC to exempt the NFT market from regulation
Although the issue of NFT royalties may not fall within the scope of SEC disputes, NFT trading platforms face a different situation. In August 2024, the NFT trading platform OpenSea received a Wells notice from the SEC, charging that 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 said the result was a win for the entire industry.
After the SEC investigation concluded, OpenSea’s legal team submitted a letter to Peirce, who leads the SEC’s cryptocurrency task force. OpenSea general counsel Adele Faure and deputy general counsel Laura Brookover emphasized in a letter on April 9 that the NFT trading platform does not meet the definition of a broker under U.S. securities laws.
These legal experts pointed out that the trading platform neither performs trading operations nor participates as an intermediary. They urged the SEC to "clearly state that NFT trading platforms like OpenSea do not fall within the scope of exchanges under federal securities laws."