Securities law enforcement entered the metaverse recently in the form of an emergency cease and desist order issued by the Texas State Securities Board against individuals and a company using NFTs to finance multiple metaverse casinos. Much like Wyatt Earp busting into the O.K. Corral, this one gets interesting.
The order alleges a high-tech fraudulent securities offering in which the respondents sought to raise capital via the offer of more than 12,000 non-fungible tokens or “NFTs” to fund development of multiple virtual casinos across metaverse platforms. These casinos would be spaces a person could enter virtually (in avatar form) to play the types of games often found in brick-and-mortar casinos. In many cases, the virtual land to build the casinos had already been purchased. Respondents were allegedly also developing a web 2.0 casino available online via the plain old internet.
The order describes two classes of NFTs: 11,111 “Gambler” NFTs and 1,111 “Golden Gambler” NFTs. The Golden Gamblers conveyed rights only to the profits of the web 2.0 casino, while the Gambler tokens gave holders rights to profits across all casinos — both virtual and web 2.0. The developers held 334 of the Gambler tokens for themselves. Respondents projected that the metaverse casinos would generate profits in the aggregate of $3 million to $60 million USD per month. Respondents projected the web 2.0 casino to haul in between $2 million and $25 million USD in profits per month.
Around the time of the order, Gambler NFTs were listed on popular NFT sites for between 0.23 ETH (~$744 USD) and 777.77 ETH (~$2.5 million USD). Golden Gambler NFTs were listed for between 2.13 ETH (~$7,000 USD) and 169 ETH (~$547,000 USD). According to the cease and desist order, respondents were heavily promoting their project and were also hacked at one point, resulting in a loss of approximately 50 ETH (~$162,000 USD).
The order alleges securities registration violations, deceit of likeness (the web 2.0 casino was called “Sands Vegas”), and numerous other counts of deceit, fraud, and concealment. These allegations relate to failing to disclose the qualifications of the principals, not disclosing minting royalty amounts, deception as to prior casino experience, and lack of disclosure regarding the developers, among others.
The intersection of law, policy, and the metaverse is rapidly developing and will continue to evolve over time, as we previously covered. Most in this space are working hard to do the right thing and convince regulators that this is not the “Wild West.” Alleged facts like this obviously don’t help in that regard. Others who are active in the metaverse will want to take note that regulators are already looking at activity in this space and will likely apply existing laws and regulations, despite the novelty in this area.