SEC Clarifies NFT Royalties Not Securities, Citing Streaming Income Parallels

U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce has clarified that non-fungible tokens (NFTs) with royalty mechanisms for creators typically do not qualify as securities under federal laws. In a recent speech, Peirce emphasized that NFTs enabling artists to earn resale revenue do not inherently fall under securities regulations, distinguishing them from traditional investments like stocks. She compared NFT royalties to streaming platforms paying artists per use, arguing such arrangements reflect business income rather than investment returns. Peirce noted that NFTs do not grant holders rights tied to business profits or enterprises, which are hallmarks of securities.

Peirce’s remarks sought to address ongoing confusion around NFTs’ legal status. She stressed that royalties paid to creators after NFT sales do not transform the tokens into securities. Instead, such payments mirror established practices like music royalties, which are not regulated as investments. “The artist or creator is not an investor,” Peirce explained, underscoring that royalty income for creators is akin to business revenue, outside the SEC’s purview.

Oscar Franklin Tan, a legal expert with Enjin’s Atlas Development Services, supported Peirce’s stance, calling it legally sound but noting media misinterpretations. Tan clarified that Peirce’s comments merely reinforced existing legal principles: royalties for creators have never been considered securities. He argued that U.S. securities laws focus on regulating investments, not compensating artists for their work. “Royalties from secondary sales are business income, not investment gains,” Tan said, adding that the SEC has never prohibited such arrangements.

Tan cautioned, however, that complexities arise if NFTs promise shared profits to multiple holders beyond the original creator. In such cases, the line between creator compensation and securities becomes blurred. He urged regulators to apply traditional legal frameworks to blockchain innovations: “Ask whether the same structure would pose regulatory issues if executed via paper contracts. If not, proceed cautiously.”

While NFT royalties appear settled under SEC rules, regulatory scrutiny persists for NFT marketplaces. In 2024, OpenSea received a Wells notice from the SEC, which alleged some NFTs traded on its platform could be unregistered securities. However, the SEC closed its investigation in February 2024, a win for OpenSea and the industry. Following this, OpenSea’s legal team wrote to Peirce, requesting the SEC clarify that NFT marketplaces do not qualify as brokers or exchanges under securities laws. They argued marketplaces merely facilitate transactions without acting as intermediaries.

Peirce’s clarification underscores a nuanced approach to regulating blockchain-based assets. Her stance aligns with broader efforts to distinguish between decentralized digital tools and traditional financial instruments. While NFT royalties remain unclassified as securities, the SEC’s focus on marketplaces highlights lingering uncertainties in applying legacy frameworks to novel technologies. As regulators and innovators navigate this terrain, Peirce’s emphasis on analogies to existing practices—like streaming royalties—provides a roadmap for balancing innovation with compliance.

The debate underscores the need for clear guidelines to prevent overregulation of legitimate creator-driven models. With NFTs increasingly mainstream, Peirce’s position aims to ensure legal clarity without stifling technological progress. Yet, as cases like OpenSea show, the interplay between NFT platforms and securities laws remains a critical battleground for defining the future of digital ownership.