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Has Securities Fraud Entered the Metaverse?

What is a virtual world without actual securities fraud? In what is believed to be the first state securities enforcement action involving non-fungible tokens ("NFTs") and the Metaverse, the Texas Securities Commission has issued an Emergency Cease and Desist Order "to stop an illegal and fraudulent securities scheme tied to virtual casinos - including virtual casinos in metaverses." The Respondents allegedly claim to be developing an internet casino and virtual casinos in various metaverses, funded through the sale of more than 12,000 NFTs which, the Respondents claimed, are not regulated by the securities laws. The TSC disagrees, however, alleging that the NFTs in question "constitute investment contracts and certificates in or under profit sharing agreements and as such the Securities Act regulates their offer and sale in Texas." While many early adopters of NFTs insist that NFTs are not securities, the SEC does not seem to agree and will presumably apply the traditional securities test to NFTs on a case by case basis.

“While many will say, ‘Meta-what?’ Metaverses—and the concept of a singular metaverse—present exciting new commercial and social opportunities,” said Commissioner Iles. “Unfortunately, bad actors often attempt to capitalize on hype to defraud the public.” The order accuses the Respondents of leveraging interest in metaverses to perpetrate a high-tech fraudulent securities offering. According to the order, they are offering 11,111 Gambler NFTs in connection with their development metaverse casinos in popular metaverses such as the Sandbox, Decentraland, Infinity Void, and NFT Worlds. The metaverse casinos reportedly act as real casinos except they operate in virtual worlds. Gamblers, acting through avatars, can enter the metaverse casinos and play poker and other games using cryptocurrencies. Purchasers of the Gambler NFTs profit from these operations.