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Four States Take Enforcement Action Against Virtual Casino for Allegedly Offering NFTs That Were Securities | Skadden, Arps, Slate, Meagher & Flom LLP

Skadden, Arps, Slate, Meagher & Flom LLP

State securities regulators in Alabama, Kentucky, New Jersey, and Texas filed concerted enforcement action against Slotie NFT d/b/a slotie.com on October 20, 2022, requiring the company to stop selling various Slotie Non-Fungible Tokens (NFTs) on that grounds that they are unregistered securities. As discussed below, NFTs provided holders with, among other benefits, a share of the revenue from the virtual casino that Slotie promised to build and operate.

These enforcement actions serve as an important reminder of the role of state securities regulators in the Web3 space and mark the second time that a virtual casino has been prosecuted by state regulators for offering unregistered securities in the form of NFTs. (See our Apr 20, 2022 Customer Alert “Texas and Alabama Regulators Order Virtual Casino NFT Sales to Stop Alleging They constituted an Offer of Securities and Misled Buyers” for our summary of the first action at Sand Vegas Casino Club.)

Background

Slotie launched in October 2021 and offered NFTs called Sloties and Slotie Juniors that would provide owners with, among other benefits, joint ownership of a percentage of revenue generated through third-party online slot machines and through decentralized finance (DeFi). ) game metaverse. Owning these NFTs will also give the holders access to various cash draws and lotteries, as well as the ability to generate WATT, a token that can be used to breed Slotie Juniors. Rarer NFTs purportedly gave holders a larger share of the income.

Slotie has made several other claims, including that only 5,000 Slotie Juniors will ever be made available to the public, and another 5,000 Slotie Juniors will be reserved for breeding by Slotie owners. According to the Slotie websites, owning a Slotie Junior “literally doubles the profits of a Slotie owner,” and owners of these NFTs will receive plots of land in the SlotieVerse metaverse through giveaways and will be able to earn income from sales, rentals, and construction. casino on such land or by receiving royalties from advertising on that land. According to government regulators, at the time the order was issued, Slotie was not giving away land to Slotie Junior NFT holders or making land in SlotieVerse available for sale.

In November 2021, Slotie began using the Slotie and Slotie Junior websites, as well as various Slotie social media platforms, to seek NFT sales to raise capital to develop the SlotieVerse casino. Slotie claimed that its Slotie NFTs sold out in less than 5 minutes and Slotie Junior NFTs in less than 2 minutes, although there is no evidence of this on the Ethereum blockchain according to New Jersey regulators. In April 2022, OpenSea delisted the Slotie NFT collection.

States issue emergency cease and desist orders

The government orders state that Slotie is funding the online casino and gambling metaverse by selling at least 10,000 NFTs in violation of each respective state’s securities laws. Each regulator noted that NFTs are similar to shares and other shares, are investment contracts and certificates in or under profit-sharing agreements, and are not registered.

The orders also allege that the company withheld material information, such as information relating to the game development team who are listed as the company’s managers, and the actual and expected use of the capital raised from the NFT sale. In addition, the orders state that the company has not disclosed a list of significant risks associated with investing in its securitized NFTs. This list of risks is nearly identical to the list of risks that the Texas and Alabama regulators raised in the Sand Vegas Casino Club lawsuit, as it is not disclosed:

  • Attackers may hack into or exploit systems and steal NFTs or related digital assets, attempt to impersonate NFT owners, create counterfeit NFTs, sell copies of original NFTs, or misuse art related to NFTs;
  • Domestic or foreign governments may enact laws or regulations that adversely affect the use, transfer, exchange, or price of NFTs;
  • NFTs compete with other digital assets and this competition can negatively impact the price of NFTs;
  • The NFT market is new and volatile, and the price of NFTs against fiat currency can drop significantly in a short period of time, which will affect the liquidity of NFTs and its price; as well as
  • Businesses or organizations issuing NFTs may go out of business, file for bankruptcy, or cease operations, thereby reducing the use or value of their NFTs.

The states also accused Sloty of not disclosing the risks of creating a metaverse casino, including:

  • Failure to successfully promote the SlotieVerse Metaverse, or failure to increase or retain customer base, may adversely affect profitability or result in losses;
  • SlotieVerse competes with physical, virtual, and metaverse casinos, and significant investment in technology, research, development, and marketing may be required to maintain or improve competitiveness;
  • SlotieVerse competes with other forms of gambling, games, entertainment and free games;
  • Failure to obtain or retain any required license may result in the closure of the casino at SlotieVerse; as well as
  • Metaverses compete with each other, and this rivalry can limit the population of each such metaverse and the number of casino customers in the metaverse.

Based on these alleged facts, the authorities in each state, in their respective orders, have concluded that both Slotie and Slotie Junior NFT meet the definition of a security under each state’s securities laws because they were sold to raise capital for the business. virtual casinos and were not registered and are not subject to release. They also concluded that Sloty had made fraudulent misrepresentations. Due to these infringements, government orders required them to cease and desist from further infringements and denied Slotie an exemption from registration under each state’s securities laws.

Key Findings

The enforcement action serves as an important reminder that companies in the Web3 space must be mindful of the application of state securities laws to their business activities and, even if the NFTs offered are not securities, the importance of disclosing material risks to purchasers.

Legal Clerk Lilia Jimenez contributed to this article.

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