NFTs Funding Online Casinos Flagged As Securities By Texas Regulators

Written By Tyler Andrews on May 19, 2022 - Last Updated on December 8, 2022
NFTs funding online casinos cease and desist in TX

Texas and Alabama have blazed a trail into uncharted territory.

Securities commissions in both states recently handed down cease-and-desist orders to a company selling NFTs (non-fungible tokens) used to fund the development of online casinos in the metaverse.

The states allege the NFTs sold by online casino developer Sands Vegas Casino Club represent unregulated securities. They also say the company told buyers directly that the NFTs did not represent securities. And even if they did, securities laws do not regulate any NFTs.

The orders to the Cyprus-based developer founded by Martin Schwarzberger and Finn Ruben Warnkeappear seem to be the first instance of securities regulators intervening in the metaverse.

The universe of NFTs is rapidly expanding as we recently reported on crypto being the hot new sponsor to major league sports. However, it seems this is where the line is drawn with NFTs.

Also to note, online casinos in TX are only available through sweepstakes platforms.

Proceeds go to two metaverse platforms

Sands Vegas is currently offering two levels of NFTs for purchase: Gambler and Golden Gambler. Proceeds from both go toward the purchasing of casino “land” in two metaverse platforms, Decentraland and The Sandbox.

Both are available for purchase solely through the cryptocurrency Ethereum. Current data suggests the 30-day average price for the Gambler NFT is .3293 Ether (ETH), or $1,030. The 30-day for the Golden Gambler is 1.89 ETH, or $5,900.

Sands Vegas created 11,111 Gambler NFTs, of which blockchain data suggests that 4,200 were sold. Likewise, they created 1,111 Golden Gambler NFTs and sold 624.

The company forecasts proceeds of around $24,000 for the Gambler NFT and $81,000 for the Golden Gambler in the first year. It is with this data that the securities commissioners stepped in.

Purchases provide profit-sharing opportunities

Sands is making no qualms about building profit-sharing into the NFTs. They’re offering the owners of these NFTs profit-sharing opportunities to the tune of:

  • 50% profit of the original casinos for Gambler NFT owners
  • And 30% profit for the Web2.0 (future) casino aimed mainly at high rollers for Golden Gambler NFT owners

Therefore, selling NFTs that have the potential to earn the buyer profits on the basis of how many other random people, in this case, virtual casino gamblers, gamble in the Sands Vegas virtual casinos seems to clearly suggest the NFTs represent securities in the legal sense. This is a restatement of the Howey Test in securities law. To determine whether something is a security or not, one must use the Howey Test.

By identifying the NFTs for sale as securities, Texas and Alabama have both immediately come down on the company for not registering to sell securities in the states. Nor has the company registered the Gambler and Golden Gambler NFTs as securities.

A scheme to obstruct

The Texas Securities Commission claims the developers are actively “devising a scheme to obstruct any attempt to regulate the Gambler NFTs and Golden Gambler NFTs.”

What Sands Vegas is doing, in the words of Texas Securities Commissioner Joe Rotunda, is “misleading purchasers by claiming they can simply avoid securities regulation by implementing illusory features or using different terminology.”

What exactly these “illusory features” are is unclear. However, by promoting their casino campaign through social media platforms and receiving a boost from influencers, Sands Vegas is hoping to get people on board before the dust settles on the NFT-as-security debate.

Rotunda warns that “all investments bear risks, and these risks may significantly impact the bottom line.”

What, among other things he is alluding to, is cybersecurity. More specifically, breaches of it, which Rotunda describes happened to the social media account of Sands Vegas. Which resulted in the misappropriation of 50 ETH, valued at over $150,000.

From state to federal action

While the actions of Texas and Alabama are relatively small in the world of cryptocurrency and NFTs, the potential for NFTs to be used more and more commonly as securities has left the federal Securities and Exchange Commission (SEC) in an uncomfortable position due to a lack of clear regulations.

This means that investors will likely try to exploit what they can. Thus, the likelihood for other states to jump on the bandwagon with Texas and Alabama to shut this down seems great.

This would appear to be what is needed to handle a Cyprus-based company offering a cutting-edge security investment in the nascency of the metaverse.

If only Tony Stark were still alive …

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Written by
Tyler Andrews

Tyler is the Managing Editor for PlayTexas, covering sports, sports law and gambling for the Lone Star State. He has also covered similar topics for a number of Catena Media's regional sites including NCSharp, PlayCA, PlayFL, PlayOhio, and PlayMA. Tyler is a Texas resident and currently specializes in covering gambling legislation and news in emerging US markets.

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