A Blog About Online Gaming and Entertainment Regulations
State Securities Regulators Intervene In Virtual Casino NFT Sales
State regulators in three states took the first steps in regulating non-fungible tokens (“NFTs”) as securities, issuing cease-and-desist orders against the online casino developer Sand Vegas Casino Club (“Sand Vegas”) and its co-founders for allegedly offering unregistered securities and violating various other securities-related regulations.
As we have written, NFTs use smart contracts to offer holders novel functionality, like granting them access to certain services, events, and other benefits. In certain forms, though, NFT sales can begin to look like investment contracts, which are subject to federal and state registration requirements.
Orders by Texas, Alabama, and Kentucky Securities Regulators
On Wednesday, April 13, the Texas State Securities Board and the Alabama Securities Commission, with support from the Kentucky Department of Financial Institutions, issued parallel orders that classified Sand Vegas’s “Gambler NFTs” as securities, marking the first time a state agency has reached that decision in a formal order. The orders from Texas and Alabama name as respondents both the company and its co-founders, Martin Schwarzberger and Finn Ruben Warnke, and allege that they were offering unregistered securities to fund the expansion of their online casino.  The order found that NFT owners were entitled to various benefits, including pro rata revenue share from the project, which the parties estimated or promised buyers to be as much as $81,000 per year. Similarly, the ownership of the NFTs conveyed ownership over the project itself.
Specifically, Sand Vegas allegedly offered 12,222 NFTs in two tiers: “Gambler NFTs” (11,111 offered total) and “Golden Gambler NFTs” (1,111 offered total), both of which conferred benefits onto owners in similar yet distinct ways. Gambler NFTs conveyed ownership and profit share of 50 percent in the project’s metaverse (“Web 3.0”) casino—including profit generated from games and the sale of other virtual items—in addition to the 20 percent of profits from the web-based (“Web 2.0”) casino. Golden Gambler NFTs were associated only with the Web 2.0 casino, with owners being entitled to 30 percent of the Web 2.0 casino profits. According to the orders, the respondents represented that total profits generated from metaverse casinos and the web 2.0 casino would range from $3,000,000 to $60,000,000 per month. Sand Vegas also offered additional benefits to NFT owners, like free entry into casino tournaments, premium advertisement rates, and guaranteed entry into a monthly lottery, which promised prizes from monetary rewards of $250,000 and iPhones, MacBooks, and cars.
Can NFTs be Regulated as Securities?
While the Texas and Alabama orders do not lay out the states’ analysis of the securities laws, our February 2022 blog post discussed the extent to which NFTs that are marketed as fundraising vehicles and revenue-share opportunities can be regulated as securities under the U.S. Supreme Court’s Howey test. Securities regulators across different jurisdictions, including at the U.S. Securities and Exchange Commission (“SEC”), have stated that they are ready to treat certain types of digital assets (including NFTs) as securities if they exhibit certain characteristics. Among other features, the SEC has cautioned market actors that digital assets can constitute securities if they promise to generate value for buyers through the project’s efforts alone. 
In the Sand Vegas case, the Texas and Alabama regulators observed that the company went so far as to assert that its NFTs are not securities, an assertion the agencies declined to accept. In addition to highlighting registration requirement violations, the regulators stated that (1) the company’s use of the name “Sand Vegas” was likely to mislead the public (which might misconstrue it as related to Las Vegas Sands); (2) the company intentionally obscured its physical location and address; (3) the company failed to disclose the identity and qualifications of various related individuals; (4) the company did not disclose the value of royalties it collected on transactions of Gambler NFTs and Golden Gambler NFTs; and (5) the company did not adequately disclose the risks related to casino operations and securities investments, among other alleged infractions.
Impact of NFT Regulations
While the Sand Vegas case marks the first case of NFTs being regulated as securities, it is unlikely to be the last. Texas securities enforcement director Joe Rotunda told Reuters that the regulator has spotted several securities offerings in the metaverse and that it is “coordinating among states to investigate the offerings and plan enforcement actions if necessary.” 
This case underscores the need for diligence in developing new NFT products. In addition to ensuring compliance with securities laws and regulations, companies must be cognizant that the full range of laws and regulations apply to metaverse products, from consumer protection laws to gambling statutes.
 Some may notice the similarities of the project’s name and logo to the Las Vegas Sands Corporation. It should be noted that, while the project was planning to create Las Vegas in the metaverse, they are not associated or affiliated with the Las Vegas Sands Corporation.
 See the following: Framework for “Investment Contract” Analysis of Digital Assets by the U.S. Securities and Exchange Commission; Comments by SEC Commissioner Hester Peirce on Decrypt.co and Business Insider; Remarks Before the Aspen Security Forum by SEC Chair Gary Gensler