SEC Serves NFT Project CyberKongz With Wells Notice Citing Securities Violations

The U.S. Securities and Exchange Commission has issued a Wells Notice to NFT gaming project CyberKongz, marking the latest regulatory probe into an entity of its type.

“The SEC’s Division of Enforcement have approached us with very concerning rhetoric that you can not have a token (ERC-20) in tandem with a blockchain game without registering it as a security,” the project said in a statement posted to X on Monday.

A Wells Notice informs recipients that the regulator is thinking of undertaking enforcement actions based on what it discovers from preliminary investigations. Once served, the notice typically gives recipients 30 days to respond before the SEC decides whether to pursue it.

A full-blown investigation and subsequent charges against CyberKongz could present “major implications” for the blockchain gaming industry, it said, adding it would “defend against this stance for the wider space.”

In particular, projects combining NFTs with utility tokens could be affected. CyberKongz, which operates without venture funding or significant treasury reserves, said it plans to challenge the notice.

“We have been suffering in silence for the last two years, ever since we first received contact from the SEC,” CyberKongz said, alleging the regulator has “a complete lack of understanding of blockchain technologies,” which has resulted in “unjust accusations and information inaccuracies.”

CyberKongz and the SEC did not immediately respond to Decrypt’s requests for comment.

The SEC’s concern is centered on the NFT project’s April 2021 Genesis Kongz contract migration, which regulators interpreted as a token sale, according to the company’s statement. CyberKongz maintains this was purely a technical upgrade rather than a securities offering.

“If they cannot distinguish between a primary sale and a contract migration, what hope do we currently have for a clear regulatory pathway going forward?” the project said.

As a gaming platform, CyberKongz provides users with features such as randomly generated 2D and 3D avatar NFTs used in “play & kollect” games on the Ronin blockchain.

The notice served to CyberKongz follows similar regulatory scrutiny leveled against NFT platform Immutable in November, in which token sales were also put into question.

“You know you’re part of a revolution when you start to become persecuted,” says Jihoz Zirlin, co-founder of Axie Infinity, commenting on X. “I stand with CyberKongz.”

Despite the revelation, the project’s floor price remains steady at 8.2 ETH ($32,800), up 14.4% over 24 hours, CoinGecko data shows.

Edited by Sebastian Sinclair