Non-Fungible Tokens

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In its third action involving NFTs, the SEC targets a restaurant membership token tied to fundraising and promises of potential price appreciation for buyers.

By Jenny Cieplak, Ghaith Mahmood, Nima H. Mohebbi, Stephen P. Wink, and Deric Behar

On September 16, 2024, the Securities and Exchange Commission (SEC) issued a cease-and-desist order (the Order) against Flyfish Club, LLC (Flyfish) for an unregistered offering of crypto asset securities relating to Flyfish’s sale of $14.8 million worth of non-fungible tokens (NFTs), in violation of Section 5 of the Securities Act of 1933 (and no exemption from registration was available). The SEC alleged that the NFTs were issued to the public to finance the construction and operation of a members-only restaurant and club in in New York City.

Flyfish neither admitted nor denied any wrongdoing as part of the settlement, which does not include any allegations of misleading or fraudulent statements.

The SEC obtained this settlement roughly a year after its first and second enforcement actions against NFT issuers (for more information, see this Latham blog post on the first enforcement and this Latham blog post on the second enforcement), and less than a month after issuing a Wells Notice against one of the industry’s largest NFT marketplaces.

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Understanding NFTs as commodities calls for a more nuanced analysis than what their “non-fungible” label might suggest at first glance.

By Yvette D. Valdez

The appropriate regulatory characterization of cryptocurrencies and digital assets for US legal purposes has spawned many pages of analysis and occupied many hours of industry, law firm, and regulatory consideration. Significant amounts of commentary, and later government and judicial attention, have been devoted to determining whether fungible cryptocurrencies and digital assets constitute securities for purposes of…

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In its second action involving NFTs, the SEC targets an offering tied to fundraising and promises of future value.

By Ghaith Mahmood, Nima H. Mohebbi, Stephen P. Wink, Douglas K. Yatter, Adam Zuckerman, Luca Marquard, and Deric Behar

On September 13, 2023, the Securities and Exchange Commission (SEC) issued a cease-and-desist order (the Order) against Stoner Cats 2, LLC (SC2) for an alleged unregistered securities offering relating to SC2’s sale of $8.2 million worth of non-fungible tokens (NFTs). The SEC alleged that the NFTs were issued to the public to finance the production of a web-based animated series by the same name.

SC2 agreed to a settlement that includes a civil monetary penalty of $1 million and ceasing and desisting from violating the Securities Act of 1933. SC2 neither admitted nor denied any wrongdoing as part of the settlement, which does not include any allegations of misleading or fraudulent statements.

The SEC obtained this settlement a few weeks after its first enforcement action against an NFT issuer (for more information, see this Latham post). This second action may signal a meaningful escalation in the area of NFTs.

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In its first enforcement action involving NFTs, the SEC focused on issuer marketing that promised outsized returns on investment and platform building.

By Ghaith Mahmood, Nima H. Mohebbi, Stephen P. Wink, Douglas K. Yatter, Adam Zuckerman, and Deric Behar

On August 28, 2023, the Securities and Exchange Commission (SEC) issued a cease-and-desist order (the Order) against a Los Angeles media and entertainment company (the Company) for an unregistered securities offering relating to its sale of $29.9 million worth of non-fungible tokens (NFTs)[1]. The company agreed to a settlement that includes disgorging $5 million, paying another $1 million in fees and penalties, and ceasing and desisting from violating the Securities Act of 1933. Notably, the settlement does not include fraud charges.

NFT creators and consumers should evaluate the legal and commercial considerations of NFTs that are linked to copyright work.

By Andrew Moyle, Christian McDermott, and Avinash Balendran

The Law Commission of England and Wales (the Commission) is a statutory independent body that keeps the law of England and Wales under review and recommends reform where it determines that it is needed. The Commission recently published a public consultation paper on digital assets which closed on 4 November 2022.

Mobile and desktop reference tool defines nearly 600 industry terms.

Latham & Watkins has published the second edition of The Book of Jargon® — Blockchain, Crypto & Web3, a comprehensive digital glossary developed for the business, academic, and legal communities. The resource renders the often complex vocabulary, acronyms, and slang of the blockchain, cryptocurrency, and Web3 sector more accessible and understandable to all.

With nearly 600 terms, the user-friendly glossary is roughly double the size of the first edition…

Bitcoin Association for BSV will release software to facilitate court orders to freeze stolen or lost coins, while some courts recently authorised service proceedings by tokenised airdrop.

By Christian F. McDermott, Andrew C. Moyle, and Nara Yoo

Earlier this year, in Tulip Trading Ltd (TTL) v. Bitcoin Association for BSV (Bitcoin Association) and others, the UK High Court held that bitcoin software developers do not owe a duty of care to bitcoin owners who have lost their…

The SFC issued a statement to clarify its regulatory approach in relation to non-fungible tokens and remind investors of related risks.

By Simon Hawkins, Farhana Sharmeen, Adrian Fong, Gen Huong Tan and Shirley Wong

On 6 June 2022, the Hong Kong Securities and Futures Commission (SFC) issued a statement drawing attention to the risks associated with investing in non-fungible tokens (NFTs) and summarising the legal and regulatory requirements applicable to NFTs.

This follows recent guidance from Hong Kong’s banking, securities, and insurance regulators to financial institutions looking to undertake virtual asset activities (see Latham’s Client Alert Hong Kong’s New Crypto Regulatory Framework to Facilitate Greater Institutional Participation). Together, the statement and guidance demonstrate that the regulators are continuing to look closely at the digital asset space.

NFT creators should craft strategies to avoid minting or auctioning NFTs that use the likeness of an individual without their consent.

By Ghaith Mahmood, Nima H. Mohebbi, and Tara McCortney

As non-fungible tokens (NFTs) increase in popularity, the so-called common law “right of publicity” may create additional legal risks for NFT minters. The common law right of publicity prevents the commercial exploitation of an individual’s identity without that person’s consent.[1] Most U.S. states have defined a right of publicity and, correspondingly, a standard tort for violation of that right — frequently referred to as the tort of appropriation.

While the law is similar across most US jurisdictions, California — the heart of the entertainment industry — has particularly well-developed authority in this area. For this reason, this blog post focuses on California law in describing the unique issues that NFTs may present.

Learn about 2021’s defining cryptoasset in a new infographic video and webcast, the latest in a Latham series covering NFTs.

By Christian F. McDermott

Latham & Watkins Technology Transactions Partner Christian McDermott introduces the basics of non-fungible tokens (NFTs) in this short infographic video. In particular, he addresses the following questions:

  • What are NFTs?
  • How are they created and managed?
  • How does blockchain technology fit in?
  • What are the benefits of NFTs?
  • What legal issues do NFTs present?