In a space where regulation and innovation often clash, recent remarks by U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce have offered a welcome breath of clarity for NFT creators and collectors alike. Speaking about the nature of royalties embedded in non-fungible tokens (NFTs), Peirce made it clear: simply including royalties for artists does not transform an NFT into a security.
Peirce drew a helpful comparison between blockchain-based royalties and traditional streaming revenue. Just as musicians earn payments every time their song is played on a digital platform, NFTs can be coded to pay creators a small cut each time the token is resold. This design allows artists to benefit from the growing value of their digital work over time—without creating the sort of investment contract that securities law typically governs.
Importantly, Peirce emphasized that such royalty features do not bestow any ownership in a business enterprise, nor do they entitle the NFT holder to recurring profits—a hallmark of what U.S. securities law traditionally seeks to regulate.
Misinterpretations Stir Confusion
Despite Peirce’s attempt to bring clarity, her comments were quickly misinterpreted by some headlines in the media, according to legal expert Oscar Franklin Tan. Tan, chief legal officer for Enjin contributor Atlas Development Services, said the misunderstanding lies in presenting Peirce’s clarification as a groundbreaking shift—when in fact, it aligned with existing legal interpretations.
“The way some media outlets reported it made it seem like this was a new, bold position,” Tan explained. “But legally speaking, it’s not even controversial. NFT royalties were never classified as securities in the first place.”
He explained that royalties paid to artists through NFTs are akin to business income, not investment returns. “The creator isn’t a passive investor. They’re the party delivering the product or content. That’s not what the SEC is targeting when it enforces securities law,” he added.
Tan did, however, point out a more nuanced legal gray area: when NFTs offer profit-sharing mechanisms to multiple holders—beyond the original creator—things start to look more like a security, and regulators may begin to take interest.
Marketplace Regulation: A Different Story
While royalty mechanisms in NFTs seem safe from the SEC’s spotlight, the same can’t be said for NFT marketplaces. Last year, OpenSea, one of the leading platforms for NFT trading, received a Wells notice from the SEC suggesting that some NFTs sold on the platform could be classified as unregistered securities.
That situation took a positive turn earlier this year. On February 22, OpenSea CEO Devin Finzer announced that the SEC had concluded its investigation without taking enforcement action. This decision was widely seen as a victory not just for OpenSea, but for the broader NFT ecosystem.
In follow-up correspondence to Commissioner Peirce, OpenSea’s legal team urged the SEC to go a step further. They requested the Commission issue a clear public statement affirming that platforms like OpenSea should not be treated as brokers or exchanges under securities law—arguing that these marketplaces merely facilitate transactions and don’t act as intermediaries in the traditional sense.
Looking Ahead
Peirce’s comments and the SEC’s closure of the OpenSea case suggest a growing willingness to approach NFTs with nuance, distinguishing between tools that empower creators and structures that resemble financial products. For now, creators can take some comfort knowing that building royalties into their NFTs won’t automatically invite regulatory scrutiny.
As Tan wisely put it: “Always ask yourself—if this same deal happened on paper instead of blockchain, would it raise red flags?” For NFTs that simply reward artists, the answer is increasingly clear: probably not.
