June 13, 2021

Volume XI, Number 164

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Rulemaking Petition Seeks SEC Guidance on NFTs

A recent rulemaking petition to the SEC requests that the agency issue a concept release on nonfungible tokens, or NFTs. The petition is hopeful that an SEC rulemaking paired with an opportunity for public input will resolve regulatory uncertainty for parties looking to create NFTs and facilitate their sale.

The petition opens by noting that the federal securities laws, first written in the 1930s, “provide a crude mechanism for the regulation of NFTs.” It then uses the SEC’s Howey guidance to consider whether NFTs should be deemed securities for purposes of the federal securities laws. The petition observes that if NFTs are deemed securities, platforms facilitating their sale and secondary trading may be deemed exchanges, broker-dealers or alternative trading systems under SEC rules. However, consistent with the market’s current approach to the issue, the petition also posits that if an NFT “relates to an existing asset and is marketed as a collectible with a public assurance of authenticity on the blockchain, it should not be deemed a security.”

To allay any potential uncertainty in the future, the petition urges the SEC to issue a concept release (which is the SEC’s term for an advance notice of proposed rulemaking under the Administrative Procedure Act) on the status and regulation of NFTs under the federal securities laws. Because NFTs do not typically function as traditional securities, the petition advocates that the SEC provide guidance that defines when an NFT is a security and what type of registration is required by firms facilitating the trading of NFTs. Doing so will, according to the petition, stimulate innovation and promote market integrity, capital formation, and protection of investors.

As we have previously noted, new SEC Chairman Gary Gensler brings a deep understanding of blockchain and digital assets to the agency. The crypto community has been hopeful that he will also bring a more progressive attitude towards the regulation of digital asset securities. Mr. Gensler is scheduled to testify for the first time as SEC chairman before the full House Financial Services Committee on May 6, 2021, but his prepared testimony does not address digital assets. As NFTs continue to proliferate, weighing in on this asset class will provide a great deal of insight to Chairman Gensler’s broader approach to the crypto space in his new role.

 

Copyright © 2021, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume XI, Number 126
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About this Author

Scott H. Kimpel Capital Markets and Securities Practice Hunton Andrews Kurth Washington, DC
Partner

Scott brings in-depth knowledge of SEC policies, procedures and enforcement philosophy to each representation.

Scott regularly advises clients across a broad sector of the economy facing sensitive reporting, compliance and enforcement matters before the Securities and Exchange Commission and other capital markets regulators. His practice encompasses a wide range of matters involving the securities laws, mergers and acquisitions, corporate governance, regulatory enforcement, administrative law and public policy. Scott also leads the firm’s working group on blockchain and distributed...

202-955-1524
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