NASAA (State Securities, not Outer Space) Cautions Investors Exploring Opportunities in the Metaverse

The North American Securities Administrators Association (NASAA), an organization of state and provincial securities regulators in the United States, Canada, and Mexico, recently issued an investor advisory warning about the potential risks of investing in the metaverse. The potential for fraudulent securities activity exists “IRL” (in real life) and in virtual worlds, whether through investing directly into a metaverse-focused company or by making an investment while par-digi-pating in the metaverse as an avatar (we may need to workshop that one a bit).

NASAA points out that the difference between investing IRL and investing in the metaverse is increasingly blurry, but “real assets can be put at risk and transferred” in either case. Importantly, the advisory emphasizes that “the rules that apply to investments in the physical world also apply to investments in virtual worlds.” On that point, the SEC and state and provincial securities regulators could not be more clear.

The NASAA advisory notes that the metaverse is “increasingly viewed as the future of the internet” with large, well-known technology companies already deploying resources to develop the space. As growth and advancements in this space continue, so too will regulatory scrutiny.

Securities regulators already seem to be paying closer attention to metaverse-related considerations, including in a Texas case we recently covered involving the use of NFTs to finance multiple metaverse casinos.

Issuers, intermediaries, or other service providers considering utilizing the metaverse or other facets of Web3 technologies must conduct themselves with the same care as they would IRL. Firms should pay special attention to the novel ways existing rules may apply in the metaverse, including in the areas of marketing and communication. Concerns around cybersecurity and the protection of personal information, an evergreen regulatory focus, are intensified given the digital landscape of the metaverse.

The NASAA advisory identified several key areas of which investors should be mindful when evaluating metaverse-related investments. These are also instructive for issuers and service providers looking to establish a meta-presence in a compliant manner:

Offerings and Personnel May Require Registration

• Offerings should be registered, or should utilize an appropriate exemption from registration.
• Absent exemptions, those providing investment advice related to securities, should be registered as an investment adviser or associated person of a broker-dealer. NASAA encouraged investors to check and verify these real-world facts before engaging with any metaverse investment.

Be Wary of Scammy and Hyped Marketing

• Don’t get caught up in the hype. Fraudsters intentionally try to generate “viral” content, but popularity is not a good criterion for evaluating investment opportunities. Nor are celebrity endorsements.
• Avoid avatars that are persistent in discussing investment ideas or asking for money.

Common Sense Remains Critical in the Metaverse

• Don’t share personal information. Identity theft can happen in any number of ways, including in the metaverse.
• Don’t ignore red flags. Every investment comes with risk, nothing is guaranteed, and nothing about the metaverse changes these tried-and-true principles.

We will continue to monitor developments in this space and provide updates as we see them.