On April 13, 2022, the Texas State Securities Board and Alabama Securities Commission issued separate emergency cease and desist orders (C&Ds) against Sand Vegas Casino Club and its two co-founders (Respondents).¹ The C&Ds allege that Respondents have been perpetuating a fraudulent securities scheme by issuing 12,222 “NFTs” to fund the creation of virtual casinos in several metaverses, as well as an online casino accessible through the internet (which they are referring to as the Web 2.0 casino).

The securities regulators assert Respondents are illegally offering and selling securities masquerading as non-fungible tokens (NFTs). According to the C&Ds, Respondents use money raised from selling the NFTs to fund the casinos, and purchasers of the NFTs become owners of the casinos and receive profits and various casino benefits (e.g., free entry to weekly tournaments and lottery tickets for prizes (including a Tesla)). Respondents represented to purchasers that increasing interest in the casinos will “definitely” cause the price of the NFTs to increase. 

According to the regulators, the NFTs are truly securities—yet Respondents advised purchasers that they comply with securities laws because those laws do not currently regulate NFTs as an asset class. The regulators allege that Respondents have further claimed they will take steps to ensure that the NFTs are not regulated by securities laws in the future by adding illusory terms to the NFTs and using different terminology when describing the payment of profits to owners of NFTs. According to the C&Ds, Respondents have also stated that “they will obtain necessary licensure, will comply with KYC requirements and will ensure minors do not gamble in the metaverse casinos.”

The C&Ds allege Respondents violated securities laws by making these and other fraudulent statements and omissions, including concealing the location and identity of the managers, misleading potential purchasers about management’s experience, and obscuring the risks associated with investing in the “NFTs” and with operating in “metaverses” generally.

The Respondents were ordered to cease and desist from offering the NFTs for sale in the respective states and from engaging in any fraud related to the same.  

Takeaways: Companies cannot rebrand a security a NFT to escape regulation. The appeal of blurring the lines between NFTs and other digital tokens is evident. While federal and state securities regulators have issued guidance regarding the regulation of digital tokens as securities (and brought enforcement actions on this basis), they have yet to promulgate regulations or provide guidance regarding how current securities laws specifically apply to NFTs.  

The Sand Vegas Casino Club C&Ds may forecast future scrutiny by regulators of whether a NFT is a security. For the purposes of federal securities regulation, whether a digital asset is a security is determined using the four-part Howey test established by the US Supreme Court in SEC v. Howey Co., 328 U.S. 293 (1946). A digital asset is a security under the Howey test if it involves an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. The parameters of whether a specific digital asset is a security is currently the subject of the closely-watched case SEC v. Ripple Labs, Inc. In that action, the SEC has alleged that Ripple violated securities laws by creating and using a digital asset that was an unregistered security.

Until state and federal regulators provide express guidance on NFTs, companies seeking to expand into Web3 and offer NFTs should carefully consider whether the NFTs constitute securities. As evidenced by these C&Ds, securities regulators will not blindly accept a company’s representation that it has issued a “NFT” if the digital asset is truly a security.

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¹ Both C&Ds emphasize that Sand Vegas Casino Club is not affiliated with Las Vegas Sands Corporation, a developer and operator of resorts and casinos. One of the alleged false representations relates to Respondents’ use of a similar name to and logos with similar design as those of Las Vegas Sands Corporation.

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