SEC Considers Allowing Crypto Startups to Raise Funds via NFTs

The United States Securities and Exchange Commission (SEC) is contemplating a notable change in its regulatory approach towards cryptocurrency, with a particular focus on non-fungible tokens (NFTs). Acting SEC Chair Mark Uyeda has indicated that crypto startups should be allowed to raise funds through the issuance of NFTs. This potential policy shift could open new pathways for blockchain-based companies to secure capital, potentially stimulating innovation and growth within the sector.

SEC Crypto Task Force lead Hester Peirce, along with Acting SEC Chair Mark Uyeda, has been leading the SEC’s efforts following the resignation of former chair Gary Gensler. Peirce has expressed optimism about the positive responses to a recent statement by the agency declaring that proof-of-work crypto mining does not fall under its definition of securities. She suggested that NFTs could be the next asset category the agency addresses with a similar exemptive statement, providing a framework or markers for NFT issuers to follow.

NFTs are digital tokens that exist on blockchain networks such as Ethereum and Solana. They are typically linked to digital art and are bought and sold on secondary marketplaces as tradeable assets. The market for NFTs peaked in late 2021, with enterprising crypto entrepreneurs making use of these tokens to raise billions for various ventures. Projects like 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, Flyfish 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 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.

However, Peirce emphasized that not all NFTs would be exempt from securities regulations. "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." This clarification underscores the need for a nuanced regulatory approach that distinguishes between different types of NFTs and their intended uses.

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. This legislative effort complements the SEC's potential regulatory shift, aiming to create a more supportive environment for crypto startups.

The implications of this regulatory shift are significant. It could lead to an increase in the number of crypto startups, as the barrier to entry for raising capital would be lowered. This could result in a more competitive and dynamic market, with new players bringing fresh ideas and technologies to the table. Additionally, the use of NFTs for fundraising could provide startups with a more stable and predictable source of funding, as NFTs can be designed to offer long-term value and utility to investors.

However, the SEC's proposal also raises important questions about investor protection and market integrity. NFTs, like other digital assets, are subject to volatility and risk, and it is crucial that investors are adequately informed and protected. The SEC will need to ensure that any new regulations are robust enough to safeguard against fraud and manipulation, while also providing sufficient flexibility for innovation to thrive.

In summary, the SEC's consideration of allowing crypto startups to raise funds through NFTs represents a significant development in the regulatory landscape for digital assets. While the potential benefits are substantial, it is essential that any new regulations are carefully crafted to balance the need for innovation with the imperative of investor protection. The outcome of this regulatory shift will be closely watched by industry participants and observers alike, as it could have far-reaching implications for the future of the crypto and blockchain sectors.