NEW YORK, Feb. 21, 2023 /PRNewswire/ -- The U.S. Securities and Exchange Commission (SEC) is currently conducting investigations that could take some NFT projects and market participants by surprise. These investigations aim to uncover potential violations of federal securities laws related to the sale of NFTs.
On May 3, 2022, the SEC announced that it would double the size of the Enforcement's Crypto Assets and Cyber Units. The expanded Crypto Assets and Cyber Unit is believed to actively scrutinize NFT projects to determine whether any violations of federal securities laws have taken place. SEC's enforcement actions targeting crypto-related projects surged after the downfall of FTX, including enforcement actions targeting stablecoins and staking activities.
When the SEC begins an enforcement action related to NFTs, it usually starts by issuing subpoenas to the projects, including often to its founders and other members involved in the project. In cases where the public identity of these individuals is unknown, it's not uncommon for the SEC to seek to identify them by serving subpoenas on third-party service providers or social media sites, such as Twitter.
Once a formal order of investigation is issued, the SEC staff can issue subpoenas requiring witnesses to testify and provide records, and other pertinent documents, including social media communications such as Discord and Telegram related to their activities.
Those who receive SEC subpoenas should treat them seriously, as noncompliance with federal securities regulations during the sale of NFTs could lead to civil or criminal penalties.
The question of whether NFTs generally can be classified as securities under U.S. law has an uncertain answer. While some NFTs may not be considered securities by regulators in the U.S., there is a strong possibility that certain NFTs could be subject to such classification. Whether a NFT is a security is a fact and circumstances question.
Although NFTs are promoted as one-of-a-kind digital assets, certain NFTs currently available in the market may have characteristics similar to "passive investments." It may be expected the SEC when applying the Howey test may conclude that certain NFTs are securities, as it has concluded already with respect to other digital assets.
Scott Andersen, Andersen, P.C., and Max Dilendorf, Dilendorf Law Firm PLLC focus their practices on federal securities regulatory compliance and defense in the digital asset space. They represent individuals and entities under investigation by the SEC and other securities regulators.
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Scott Andersen
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Max Dilendorf
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SOURCE Dilendorf Law Firm; Andersen, P.C.
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