Securities regulators in four US states have dropped the hammer on a securitized nonfungible token operator. Elia, an iGaming and casino software company in the republic of Georgia has been served with cease and desist orders by state securities regulators from Texas, New Jersey, Kentucky, and Alabama. The orders affected the company’s Slotie NFT online casino.
Federal securities laws have not caught up with NFT or non-fungible token technology yet and may or may not apply, but state regulators have been confident enough in their own laws to make this the third known NFT plot to be shut down.
The NFT casino is still up and running for international visitors but US visitors are geo-blocked by Cloudflare server technology that reads a web browser’s IP address. We were able to visit the site with an IP address from Japan.
Regulators Consider NFTs to be Securities Instruments
The site claims to have sold out all of its Slotie NFTs soon after launch in December 2021. The Tbilisi-based company was said to be using proceeds from the sale of the NFTs to fund its plans for international expansion. State regulators maintain that it was simply selling unlicensed securities.
The NFTs are 10,000 unique and individual avatars that look like a mix between a robot and a slot machine. Customers who purchased the NFTs were promised a share in the profits of all casinos where the Sloties were placed. According to the online site, the company had already partnered with 150 online casinos – however, none of those sites were listed in the company’s digital literature.
When the site launched, it contained a section on a new token called WATTs. The explanation was brief but meaningful. At some point in time, they added a disclaimer to the description that states: “Watts are utility tokens that fuel the Slotie machines. They are NOT an investment and have NO economic value. WATTs is an internal currency & 1 WATTs = 1 WATTs. Even if you will see WATTs trading on decentralized exchange platforms the liquidity is not provided by our team but by random people who saw the future utility in it.”
Regulators in New Jersey don’t seem to believe the claim that all of the Sloties were sold out quickly. In the state’s cease and desist order, investigators said, “…there is no evidence on the blockchain of 10,000 Slotie NFTs selling out in under 5 minutes.”
Normally, a casino platform provider will publish a list of “partners”, Elia Software on the other provides no such list on its website. Even when presenting a supposed case study of a bespoke betting app for the Nigerian market, no brand names are mentioned but images of completely unrelated casinos are included in the “company news”.
The cease and desist orders were to be complied with by Thanksgiving. Alabama and Texas security commissioners told Forbes they hadn’t received any responses yet.
We reported earlier here on two other metaverse casinos that had been served with cease and desist orders by regulators in at least two states. Emergency orders were filed in April against Sand Vegas Casino Club and in May against Flamingo Casino Club. Both operations promised a share of the online casino profits for investors who bought their NFTs. One area they ran afoul of state securities laws was by leaving out information about the company including financial statements. They also did not carry any warning of risk as is required.
While we were not able to identify any casino partners of the 150 claimed by Elia, we were able to find one of their games in demo mode at the RubyPlay website. Ruby Play is a legitimate online slot developer with a license in Malta and several dozen games in its portfolio. The Slotie avatar-themed slot was most likely created by RP for Elia. While the company speaks of in-house games, they do not list any on the website.
Promises of Shared Profits for NFT Holders
The order filed by the state of New Jersey quoted the following from a company announcement in November 2021: “Holding a Slotie NFT can be seen as a partnership deal between holders, casinos and Elia Software. Casinos pay 12% of their slot machines’ revenue as a commission to us for executing and distributing high-quality gaming solutions for them. We share 80% of our NFT-based slot machine revenue with the Slotie owners on a monthly basis.”
With all of the indicators that could be seen as red flags, there is also nothing that apparently shows Slotie was aware it might be violating state laws by offering what the state regulators consider to be unlicensed securities. International financial instruments are usually regulated at the federal level rather than by the states.
Alabama securities commission director, Joseph Borg says: “...in the crypto and blockchain space the federal law is still sort of up in the air.” As well, there has been no case law established that declares who has legal jurisdiction over the nascent NFT industry.
The question would seem to arise as to just what jurisdiction states should have over NFTs originating overseas. Director of enforcement at Texas state securities enforcement, Joe Rotunda, has unilaterally decided they are securities and that his office has jurisdiction. He said, “It doesn’t matter where the party is operating from. If they’re coming into our states and recruiting our constituents as part of a fraudulent scheme we will aggressively pursue action to protect our constituents. And that goes for companies operating from the former Soviet Union operating currently from Russia or in our backyards.”
Source: Online Casino Slotie Faces Regulator Deadline Over Questionable NFT Sales, Forbes, November 17, 2022