SEC’s Peirce Clarifies NFT Royalties Likely Not Securities, Easing Regulatory Uncertainty

SEC Commissioner Hester Peirce has provided clarity on the regulatory status of NFT royalties, asserting that such payments likely do not qualify as securities under federal law. Her remarks aim to address ongoing debates around how nonfungible tokens and creator compensation frameworks align with existing securities regulations.

Peirce emphasized that NFTs enabling secondary-market royalty payments for creators do not inherently meet the criteria for securities classification. Unlike traditional investments such as stocks or bonds, which typically involve an expectation of profit derived from others’ efforts, NFT royalties reflect compensation tied to the use or resale of creative work. “Royalties function similarly to revenue-sharing agreements in traditional industries,” she noted, comparing them to how artists earn income through streaming platforms. This distinction, she argued, places such arrangements outside the scope of securities laws designed to regulate investments.

Legal expert Oscar Franklin Tan supported Peirce’s stance, clarifying that royalties represent earned income rather than investment returns. “Securities law targets transactions where purchasers expect profits from the managerial efforts of others,” Tan explained. “Creator royalties, by contrast, are compensation for ongoing use of intellectual property—a business model the SEC has never sought to restrict.” He criticized prior misinterpretations of regulatory guidance, stating that the SEC has never prohibited contracts allowing creators to benefit from secondary sales. Instead, he urged regulators and market participants to apply existing legal principles to digital assets without overreach.

Despite this clarity, NFT marketplaces continue to navigate regulatory uncertainty. OpenSea, the largest NFT platform, recently closed an SEC investigation into whether certain NFTs on its platform constituted unregistered securities. While the outcome marked a partial victory for the company, it underscored the need for clearer guidelines. OpenSea’s legal team argued that marketplaces should not be classified as brokerages, as they merely facilitate peer-to-peer transactions rather than underwrite or trade securities. The SEC’s response, however, remains ambiguous, leaving operators cautious about compliance risks.

The debate highlights the broader challenge of applying legacy frameworks to emerging technologies. Peirce’s comments suggest regulators are open to accommodating innovation while ensuring consumer protections. For creators, this could mean greater freedom to monetize their work through blockchain-based systems. Yet, legal experts caution that ambiguity persists, particularly around how platforms structure transactions. “The key question is whether these arrangements could exist outside blockchain,” Tan said. “If yes, they should not face disproportionate scrutiny.”

Looking ahead, the NFT ecosystem’s growth hinges on achieving a balance between innovation and regulation. Peirce’s clarifications offer a starting point, but stakeholders urge the SEC to formalize its stance through explicit guidelines. Doing so would provide certainty for creators, platforms, and investors, enabling the NFT space to evolve as a legitimate market for artistic expression and economic opportunity.

In conclusion, Peirce’s remarks mark a pivotal step toward defining the regulatory boundaries of NFTs. By distinguishing creator royalties from securities, regulators and legal experts aim to foster an environment where digital innovation thrives without stifling creativity or financial viability. As the industry matures, collaboration between market participants and policymakers will be critical to ensuring sustainable growth.