US SEC is probing possible violations in NFT offerings

• The SEC is particularly interested in fractional NFTs
• The regulator has, over the last few months, reportedly demanded information on the matter from certain entities

Enjoying a breakout onto the scene in 2021, the NFT sector grew to become a $40 billion market. However, the US Securities and Exchange Commission, SEC, has taken note of the digital collectables and is now exploring whether they have been used in ways that violate securities laws.

According to a recently published report by Bloomberg, the Commission has initiated a probe into whether NFT offerings are securities in the last few months.

The news outlet said that the SEC has been sending subpoenas to creators behind some NFTs and crypto exchanges to provide information on the said product offerings. Bloomberg, citing people familiar with the matter, said that the regulator is attempting to determine whether the token offerings have been used to raise money just as traditional securities.

The financial watchdog is particularly interested in fractional NFTs, which are digital collectables tokenised into smaller multiple shares, which can then be held or traded by several individual collectors.

The SEC has been on watch for lawbreakers

The news comes as no surprise since the SEC has in the past hinted that NFTs could fall under its regulatory purview. Speaking to CoinDesk last December, SEC commissioner Hester Pierce indicated that some elements in the expanse of NFTs could be regulated by the SEC.

"Given the breadth of the NFT landscape, certain pieces of it might fall within our jurisdiction. People need to be thinking about potential places where NFTs might run into the securities regulatory regime," Pierce told CoinDesk TV.

Also, in March last year, Pierce said that though their 'non-fungible' status essentially meant that NFTs could not be considered securities, issuers who sold fractional interests had to exercise caution in the products they put out.

"You better be careful that you're not creating something that's an investment product — that is a security," she warned.

The SEC has been working to clamp down on irregularities in the crypto scene, and should it find the NFTs as non-compliant, then it would only add to the ongoing action by the Gary Gensler-led body. The SEC chair maintains that most crypto tokens qualify as securities and thus fall in its regulatory realm.

Last month, financial services firm BlockFi suffered a $100 million penalty from the Commission for offering unregistered securities.