SEC Clarifies NFTs Used for Royalties Not Securities

United States SEC Commissioner Hester Peirce recently clarified that the majority of NFTs, particularly those used to pay creators royalties, are not considered securities at the federal level. Peirce emphasized that these NFTs function more as models for creative compensation rather than investment products. She drew a parallel to streaming platforms, where creators earn revenue each time their content is consumed. Similarly, NFTs can generate ongoing income for creators as the value of their work increases, even after an initial sale. Peirce noted that the payment mechanisms involving royalties do not confer any interest in a business or its profits to the holder of an NFT, thereby distinguishing them from securities.

Legal analyst Oscar Franklin Tan criticized the media's interpretation of Peirce's statement, asserting that the SEC had never classified NFT royalties as securities. Tan explained that royalties are a form of business revenue, not returns on investment. He clarified that the creator or artist is not an investor but an active participant in the NFT ecosystem. Tan further stated that the distinction applies only when royalties are offered to a broad range of token holders beyond the creator, which could attract regulatory scrutiny.

Tan advocated for regulators to apply traditional legal reasoning to blockchain technology. He advised regulators to consider whether a similar scenario involving pen and paper transactions would raise regulatory concerns. If not, he suggested slowing down the regulatory process to ensure sound legal reasoning.

The debate over whether NFTs are securities extends beyond royalties. In 2024, the SEC issued a Wells notice to OpenSea, suggesting that NFTs on the platform could be unregistered securities. However, the SEC officially closed the investigation on Feb. 22, 2025. OpenSea welcomed this action and responded with a letter to Commissioner Peirce. In their letter, OpenSea's attorneys argued that NFT exchanges should not be classified as exchanges or brokers under current securities law, as they do not execute trades or act as intermediaries.