by Jude Ayua
The US Securities and Exchange Commission (US SEC) has served CyberKongz, a non-fungible token (NFT) platform, with a Wells Notice. A Wells Notice informs the recipient that the US SEC is considering enforcement actions against it based on findings from preliminary investigations. Upon receiving the notice, a recipient has 30 days to respond before the US SEC decides to proceed or not.
CyberKongz posted a statement about the notice on X: “We are extremely disappointed at the approach the SEC has taken towards us, but we are going to stand up and fight for a brighter future that holds more clarity for NFT projects.”
The US SEC cited violation of securities regulations which CyberKongz confirmed in its statement. “One of their major concerns with CyberKongz is around the ‘sale’ of Genesis Kongz in April 2021, which was actually a contract migration,” the statement noted.
CyberKongz lauded its project and stated its commitment to fight to defend the possible US SEC’s action.
“We have a small team, have never raised capital or had a large treasury, yet we have chosen to take this fight as we have always believed in pushing this space forward. Our vision has always been on innovation and pushing boundaries in web3. We are now going to fight for a clearer regulatory pathway for digital assets on the blockchain,” CyberKongz said.
Read also: Immutable: The first Web3 gaming company to receive US SEC’s Wells Notice.
SEC extends enforcement to NFTs
The US SEC is renowned for its enforcement approach to digital assets regulation, especially under Chair Gary Gensler. Since last year, the US SEC intensified its scrutiny of the NFT market, filing charges against several platforms.
In August 2023, the US SEC charged Impact Theory with conducting an unregistered offering of crypto asset securities in the form of NFTs. Impact Theory raised approximately $30 million from investors. Similarly, in September 2023, the SEC charged Stoner Cats Web Series for offering NFTs as unregistered securities.
CyberKongz said it received the first contact from the US SEC since the last two years, and has “been suffering in silence.” It noted that the SEC has shown “a complete lack of understanding of blockchain technologies that has resulted in unjust accusations and information inaccuracies.”
CyberKongz stated further that the US SEC’s Division of Enforcement approached it with a “concerning rhetoric” that having “a token (ERC-20) in tandem with a blockchain game” requires registering it as a security. It faulted the SEC’s interpretation of smart contracts, saying the agency’s inability to “distinguish between a primary sale and a contract migration” limits the possibility for a clear regulatory approach.
In a statement regarding the US SEC’s charges against Stoner Cats last year, Gurbir S. Grewal, Director, Division of Enforcement, insisted the public offering of NFTs qualify them as securities.
“Regardless of whether your offering involves beavers, chinchillas or animal-based NFTs, under the federal securities laws, it’s the economic reality of the offering that guides the determination of what’s an investment contract and therefore a security,” Grewal said.
Read also: US SEC classifies crypto mining device as security.
Implications and prospects for NFT market
CyberKongz observed in its statement that the US SEC’s enforcement measures have major implications for the entire web3 gaming industry. It also expressed optimism, saying it “will defend against this stance for the wider space…this is the start of a new beginning. One without the burden of us suffering in silence and working in fear.”
CyberKongz further expressed hope for the future of the industry: “We firmly believe brighter times are ahead for all of us… the current administration is trying to force their anti-crypto agenda. We hope that the new administration puts an end to this unjustness.”
If the Wells Notice against CyberKongz matures into a lawsuit and the US SEC eventually succeeds, it will set a negative precedent for the web3 industry, requiring all entities to obtain operating licenses to offer their products as securities.
Read also: A Guide to Identifying a Good NFT Marketplace
Jude Ayua is a policy analyst at CAB. A lawyer, Jude is an associate at Infusion Lawyers where he is a member of the Blockchain & Virtual Assets Group. He is also a member of the Policy & Regulations Committee of the Stakeholders in Blockchain Technology Association of Nigeria (SiBAN). Jude reports and writes on crypto policy and regulations. jude@infusionlawyers.com
