IOSG Ventures: How Web3 Games Dance on the Edge of SEC

IOSG Ventures: Web3 Games and SEC Regulations

Author: Simon @IOSG Ventures

Blockingrt.1 Insight

From its inception, electronic gaming has always been high-risk, high-reward. The global games market has reached 350 billion and is still growing rapidly, attracting countless practitioners to follow suit. In the traditional gaming industry, the dynamic game between industry and regulation, from under-age anti-addiction to gambling definition, has always been the development of the industry. The grey area.

For web3 games, with the addition of more financial elements and the intervention of SEC regulation, the problems that practitioners need to face will only become more complex, and the need to face regulation will only increase.

Starting from the entry point of web3 games, this article explores the points that need to be paid attention to under the US regulatory system from aspects such as product design, business model construction, operation and release:

The following are not financial/investment advice, but it is recommended that founders discuss and research with their teams.

What are Securities & Why Do They Matter?

Compared with other products, the R&D cost of games is high. In the traditional gaming industry, common financing methods for game developers include: financing from publishers, selling equity to VCs, and financing from angel investors. Web3 allows game makers to have a new way of financing from the public apart from crowdfunding platforms: selling tokens/NFTs.

New financing methods bring new paradigms, providing new living space for small and medium-sized developers, but also bring new troubles to financing. For example, many crowdfunding platforms and publishing platforms have avoided digital assets, the applicability of various securities definitions to tokens, and various uncertainties. Traditional game investors have many concerns about web3 games.

Howey Test

If a game’s token is deemed a security, it will be under the jurisdiction of the SEC. Who these tokens are sold to and how many can be sold will be directly constrained by relevant regulations. The most direct impact on tokens is that these tokens will not be able to be traded on compliant centralized exchanges in the United States. Regarding the definition of securities, we have to mention the Howey Test.

The Howey Test is a test that the SEC uses to determine whether a cryptocurrency should be classified as a security, and the regulator will judge from three aspects: investment currency, joint enterprise, and expected profit. Specifically, it is to score a project, the higher the score, the closer the nature of the token is to a security. Once it is determined to be a security, it means that the token needs to accept the same strict supervision as securities, and the issuance threshold is much higher, and if the issuer does not meet the qualifications, it will also face serious legal risks.

Most blockchain projects, including Ethereum, are trying to avoid risks and prevent their cryptocurrencies from being recognized as securities by obtaining low scores on the Howey Test.

The Howey Test mainly judges based on these four factors:

(1) investment of money;

(2) investment in a common enterprise;

(3) expectation of profits;

(4) profit comes from the efforts of a promoter or third party.

It is important to note that the Howey Test has not been directly adopted by the courts, but is only used as a reference. When some blockchain projects claim to have passed the Howey Test, they usually mean that they have obtained a low score and will not be recognized as securities, and that the blockchain project complies with US law. Finally, the so-called passing of the Howey Test by the project party is generally a corporate behavior of a law firm rather than a recognition by a US court.

Game projects often establish different entities to comply with regulations. Establishing coin-issuing entities and operating entities offshore in the US (marketing, R&D, and operations, etc.) However, independent entities cannot completely avoid regulatory risks. In practice, the SEC considers all active blocking parties involved in securities issuance, and all third-party affiliate entities are taken into account. Establishing different operating entities and coin-issuing entities cannot escape the jurisdiction of the SEC. Since this kind of ostrich mentality is not feasible, let’s face the problem. From the perspective of the Howey Test, what are the specific risk points?

#1: An Investment of Money

This is the simplest and easiest test condition to meet. If game coins, game assets, game content are sold to players, or if they are just airdropped/given to players. As long as the project party directly/indirectly benefits (such as a promotion email that requires the recipient to follow the game’s Twitter to get a game discount code), it meets the requirement of investment of money.

#2: In a Common Enterprise

Investing in a common enterprise means whether the interests of participants are bundled. This usually means

1. Commonality of interests between investors (horizontally)

2. Common interests between investors and issuers (vertical)

1. Common interests among investors (horizontal)

To meet this requirement, it usually requires investors to pool their investments together and share the profits and losses. For games, some may say that in-game NFTs are unique assets and their ownership belongs to a single investor. Some argue that the gain/loss of investors investing in two different pairs of stepn shoes are mutually independent, thereby refuting the claim that NFTs in games are securities. However, in the case of Dapper Labs, regulators stated that NBA top shots NFTs were actually collected by the issuer into a collection, which attracted more attention and buyers. In this practical case, as long as the floor price rises, all investors in this series of NFTs will benefit collectively, and vice versa. Therefore, the argument that there is no commonality among NFT investors does not hold.

2. Common interests between investors and developers (vertical)

In Web3 games, there is also an alliance of interests between investors and the issuers of the project. After purchasing NFTs, the interests between the two parties still exist. Most of the issuers of game NFTs can benefit from the royalties of the secondary market. When the price of NFTs is raised, the issuer’s revenue will also increase, and may even be more lucrative than the primary sales revenue. Many game projects also set up their own marketplace and draw water from it. In the case of NBA top shot, the developer not only charges royalties, but also benefits from the water drawn from their own marketplace. Therefore, any price increase in this collection will directly benefit Dapper Labs.

The game developer/issuer of NFTs will continue to benefit from the assets sold/issued.

#3: With The Expectation of Profit

This one is relatively ambiguous. Do players of games expect to profit from purchasing assets? Has the project explicitly designed a mechanism to generate income? Regulators generally evaluate comprehensively from product design, marketing information, player profiles, purchasing motivations, and input costs. Marketing communication that emphasizes “playing and earning,” “play-to-earn,” and “future dividend rights,” among others, is crucial. In addition, whether the purchaser’s profile is reasonable and whether the volume of assets sold is reasonable will also be taken into consideration.

“What? Someone bought 80% of your game’s skins for 1 million and they’re not even a player of your game?” That’s very suspicious. In the case of Telegram, many holders of Grams tokens were not potential users (though how to define that is also ambiguous) but rather VCs and other speculators.

It’s worth noting that:

1) The appreciation of the asset itself is not considered expecting profit, compared to a clear revenue design. For example, the gun skins in CS GO have recently skyrocketed in value, but owning gun skins does not generate profits (such as dividends), and the profits from secondary market resale cannot be considered as expecting profit.

2) This can be avoided if the buyer makes a profit from the asset through their own efforts. For example, Little Red rents Stepn’s running shoes to Little Ming outside the venue on their own initiative, which is not part of the project’s revenue design.

NFT royalties, marketplace fees, game revenue sharing, and NFT mining are all common basic operations used by many GameFi projects to attract Web3 users. However, many projects openly emphasize these features during the financing stage, as if they were holding up a sign proclaiming that they are the issuer of securities.

#4: From the Efforts of Others, not directly participating in management, relying solely on the efforts of the initiator or third party

Finally, as mentioned above, regulators will also examine the degree to which buyers rely on the issuer of the asset to profit. In other words, the more the price of an NFT depends on the project’s operation or the success/failure of the game, the more it will resemble a security. In the context of games, this is a critical point.

In addition to the dependence of token prices on the project, the price of game props is highly dependent on the utility provided by the game. Even in many cases, when tokens are issued, the game itself is still under development/not yet online, and at such times, the price of assets can be said to depend 90% on the project rather than the user’s personal efforts.

However, from this, we can think of some countermeasures that game teams can use:

Including but not limited to making users put in more personal effort before profiting: participate in “staking” before profiting, complete certain tasks/growth goals in the game, etc.

Or avoid issuing tokens too early and issue them when the game is mature.

Alternatively, increase the utility of assets in other cases: for example, in games from other companies. These can more or less reduce the dependence of asset purchasers on the publisher.

Off-topic: Fully on-chain games with enough decentralization are also a potential solution.

However, developers do not need to panic. The conclusion of the Howey Test is based on case and event, which means that the result of the Howey Test only affects the qualification of a token in a certain asset issuance, and does not affect other tokens of the same type. If GMT is judged as a security one day, it does not mean that all governance tokens of the dual-currency model are securities.

“Designing compliance-token models at the beginning” and “avoiding the issuance of tokens that may be classified as securities” are cost-effective for issuers. However, if you want to choose a safer financing method, you can directly design the financing structure according to SEC’s criteria, which specifies in detail how many times a company can issue securities, how much money it can raise, to whom it can sell and how much, information disclosure obligations, and investor protection obligations.


Dancing on the edge of a knife: pitfalls to avoid when designing tokenomics

Fungible Tokens (FT)

Let’s first briefly review the commonly used FT token design in the industry: web3 games usually use a single-token model or a dual-token model.

In the single-token model, the unique token has two ultilities: governance and in-game consumption.

In the dual-token model, the two ultilities of governance and in-game consumption are allocated to two tokens. The governance token generally has a fixed supply, and theoretically, the owner can participate to a certain extent in the decision-making of game development/operation. The ultility token generally has no fixed upper limit and is used as a circulating/pricing commodity currency in the game.

However, before deciding how many tokens/supply to issue, developers should carefully consider the actual functions of each token/NFT, as well as how the project’s value capture will be realized and distributed, instead of simply adopting the dual-token model.

Designing token economics based solely on the ease of operation may increase regulatory risks for a project.

Project teams need to reassess, including but not limited to:

  • What is the necessity of each token?
  • Are the buyers of these tokens consumers/real players in the game?
  • Although the issuer of the two tokens is the same, as discussed in the previous section, governance tokens and ultility tokens often have completely different test results. If the core design of the game can bypass some of the regulatory sensitive aspects, it is not necessarily required to issue two tokens. Why add risk to the project?

Governance tokens are usually sold to retail investors through private sales/IEO and other financing activities, while utility tokens are obtained by players in the game after completing certain in-game tasks. Under the requirements of the Howey Test, the issue method and holders of utility tokens are less like securities. However, is it enough to simply design tokens as utility tokens?

Unfortunately, in order to regulate the lifecycle of the economy and prevent gold farmers from excessively squeezing the value of ultility tokens, the development team often needs to step in and adjust gameplay mechanics after the game goes live to affect the output and consumption methods and quantity of tokens to maintain price stability, which conflicts with the last requirement of the Howey Test, From the Efforts of Others.

Simply choosing or abandoning past token models is insufficient to face regulatory pressure today.

Non-Fungible Tokens (NFT)

NFTs are also very common in web3 games, from characters and skins to land and buildings that mimic real-world assets. At first glance, these digital assets are far from securities. As analyzed above, the non-fungible nature of NFTs gives them some resistance to the Howey Test. However, it should still be noted that for some series, individual NFTs may still be highly fungible with one another, such as certain repetitive materials (mahjong, poker NFTs) that exist in large numbers in some games, which may be viewed by regulators as a common enterprise, even for a single NFT, and with the development of NFTFi, scenarios such as the fragmentation of NFTs make them increasingly fungible, making NFTs more like securities.

There is one thing worth mentioning: in the first generation of Gamefi, many games used NFT as a threshold to enter the game, a gold-digging tool. Players need to purchase Axies or running shoes (invest a certain amount of cost) before they can experience the game.

This kind of pre-investment increases the investment attribute of purchasing NFT, making the tendency of buyers expecting profit more obvious. Compared with using NFT as a threshold, it is more desirable to make the game free-to-play/free-mint, like limitbreak.

Another feasible design is to make the NFT in the game have a lifespan-as time/use, wear and tear value, or periodically reset the economic system of the game. In Tarkov, Battlestate Games periodically resets the game’s economy, and in Zelda, most weapons will wear out with attacks. These designs can alleviate the tendency of buyers expecting profit.

Extended discussion


SAFT is a common financing method for projects, and game projects are no exception. When combined with Howey Test, the situation of SAFT also becomes very ambiguous.

Theoretically, in SAFT, the purchase of tokens is divided into two steps. Investors first get an agreement that can buy tokens in the future, and then after TGE, investors get tokens. Therefore, at first glance, there is a reason to believe that the token itself is not a security.

However, in actual operation, taking Telegram as an example, the court will believe that the Howey Test needs to be applied when signing the SAFT, not at the time of TGE. In other words, all agreements related to tokens will be taken into consideration.

Using tokens already issued on the market

The Securities Act of 1933 and the Securities Exchange Act of 1934 regulate companies with assets of more than 10 million dollars and 500+ shareholders. Therefore, can Web3 game companies find a token issued by a private entity that does not meet the above requirements and use it as their own token?

Perhaps such an operation can allow Web3 companies to avoid becoming issuers of securities. However, the cost is that the game company needs to trust the compliance capability of third parties and relinquish some of the value capture capabilities. Therefore, it is recommended to conduct the most detailed due diligence on the token issuer.


1) Game project parties should pay attention to regulatory risks, and dealing with regulations will become the norm in the industry in the future. As a product with a large user base targeted at consumers, games will always be in the spotlight. Try to leave room for maneuver when designing the product, rather than issuing tokens just for the sake of it.

2) Focus on decentralization of the project’s (economic system and product operation). This is not just a marketing gimmick or a story for the community, but also a safety cushion for the project when facing regulation.

3) From any perspective, Game-fi seems to be a high-risk business at the moment. Game-fi may be a proven model, but it is not suitable for the current environment. If possible, focus on more interesting innovations, even if they are more difficult.

Blockingrt.2 Investment and Financing Events

Web3 Customer Relationship Management (CRM) Solution Provider Vantient Completes $3.45 Million Financing

* Web3

Singapore-registered Web3 customer relationship management (CRM) solution provider Vantient has completed $3.45 million in financing, with participation from Cercano Management, Saison Capital, and AC Ventures. Vantient mainly provides on-chain and off-chain customer data aggregation and analysis services for enterprises and Web3 projects to help them acquire, attract and retain users.

Web3 wallet platform Galaxy Finance announces completion of $30 million Series B financing

* Infra

Web3 wallet platform Galaxy Finance has announced the completion of $30 million in Series B financing, with participation from BlackPine, a Hong Kong investment fund, QCP Capital, a Singapore-based crypto investment firm, and Tally Capital, a US blockchain investment fund. The Web3 wallet built by Galaxy Finance can be used to store digital assets such as cryptocurrencies and NFTs. The company previously raised $8 million in Series A financing, and the new funds will be used to improve its products and expand its influence in the Southeast Asian market.

EDX Markets completes new round of financing

* Exchange

EDX Markets, a digital asset trading platform supported by Citadel Securities, Fidelity Investments, and Jiaxin Wealth Management, has officially launched trading services and completed a new round of financing. Investors include Miami International Holdings, DV Crypto, GTS, GSR Markets LTD and HRT Technology. These companies join the founding investor alliance, which includes Charles Schwab, Citadel Securities, Fidelity Digital Assets SM, Blockingradigm, Sequoia Capital, and Virtu Financial. The new funds will support EDX in continuing to develop its trading platform and consolidate its market leadership position.

dtcBlockingy Completes $16.5 Million Pre-Series A Funding Round

* Payments

Singapore-based digital payments provider dtcBlockingy (formerly Digital Treasures Center) has completed a $16.5 million pre-series A funding round led by Kwee Liong Tek, Chairman of Pontiac Land. Other investors include David Tung, former Managing Director and Partner of Carlyle Group, Jean-Marc Poullet, Chairman of Burgess Asia, and Tham Sai Choy, former Chairman of KPMG Singapore and Asia Pacific. The new funds will be used for product development, strengthening its operational and infrastructure capabilities, and expanding its global footprint.

Earn Network Raises $2.7 Million in Seed Funding

* DeFi

Community-driven liquidity investment market Earn Network has announced the completion of a $2.7 million seed funding round, led by Shima Capital, with participation from DFG, Jsquare, LD Capital, Cronos Labs, GTS Ventures, Bixin Ventures, ViaBTC Capital, Mars DAO, and Mirana Ventures. The new funds will be used to further develop new product categories, hire more professionals to join its expert team, develop communities, and establish new relationships with more underlying layers and projects.

DeFi Protocol Maverick Raises $9 Million in Funding

* DeFi

Decentralized finance (DeFi) infrastructure provider Maverick Protocol has raised $9 million in strategic round funding. The round was led by Peter Thiel’s Founders Fund, with participation from Blockingntera Capital, Binance Labs, Coinbase Ventures, and Apollo Crypto. Maverick plans to use its new funds to establish a more efficient liquidity staking token infrastructure and address cross-chain liquidity efficiency issues to further expand its ecosystem. Maverick has also launched a liquidity incentive tool called Boosted Positions (BP).

Smart Contract Infrastructure Company Neutron Raises $10 Million in Funding

* Infra

Smart contract infrastructure company Neutron has raised $10 million in funding, led by Binance Labs and CoinFund, with participation from Delphi Ventures, LongHash Ventures, Semantic Ventures, and Nomad Capital. The funds will help advance the development of Neutron’s blockchain software and promote the growth of its ecosystem.

Radius, a Shared Sorter Solution, Completes $1.7 Million Pre-Seed Funding Round

* Infra

Shared sorter solution Radius completes $1.7 million Pre-Seed round of financing, led by Hashed, with participation from Superscrypt, Lambdaclass, and Radius prevents MEV from harming users by using a practical verifiable delay encryption (PVDE) shared sorter. Radius recently announced a partnership with Saga, that is Rollup-as-a-Service, and has joined the Celestia ecosystem.

AI-driven crypto search engine Kaito raises $5.5M in Series A funding

* Middleware

AI-driven crypto search engine Kaito announced the completion of a $5.5M Series A funding round led by Superscrypt and Spartan, early-stage blockchain-focused venture capital firms under Temasek. Prior to this, Kaito revealed a $5.3M seed round led by Dragonfly, with participation from Sequoia China and Jane Street, in February 2023. The funding will be used to develop the industry’s first crypto search engine based on LLM (large language model), which will integrate Discord and Telegram messages, as well as data on the blockchain.

Vertex Protocol secures strategic investment from Wintermute Ventures


Vertex Protocol, a decentralized exchange platform based on Arbitrum, announced that it has secured a strategic investment from Wintermute Ventures, although the specific amount was not disclosed. Vertex Protocol stated that the total trading volume of spot and perpetual futures on the platform exceeded $1 billion in less than 2 months.

Institutional crypto staking platform Northstake raises about $3M in funding

* Staking

Institutional crypto staking platform Northstake has raised €2.8M (approximately $3M) in funding, with participation from PreSeed Ventures, Morph Capital, The Aventures Fund, Funfair Ventures, and Delta Blockchain Fund. The Copenhagen-based company holds over $80 million in crypto assets in 2022.

Blockingrt.3 IOSG post-investment progress

MetaMask Android app V7.0.1 adds support for WalletConnect V2.0

* Wallets

MetaMask announced that its Android app V7.0.1 has added support for WalletConnect V2.0, which is still awaiting approval from the iOS App Store.

Blockingrt.4 Industry Pulse

BNB Chain announced the launch of opBNB testnet

* Mainnet

BNB Chain has announced the launch of opBNB testnet, a Ethereum Virtual Machine (EVM) compatible L2 scalability solution based on Optimism OP Stack. opBNB greatly improves the scalability of L1 to reduce network congestion and has very low network fees, while maintaining a similar level of security to L1. The innovative underlying combination of opBNB includes optimized data accessibility, caching layer, and adjusted submission process algorithm to allow more parallel operations, making opBNB capable of up to 100M gas limit. Based on these comprehensive optimizations, opBNB can support over 4000 transfer transactions per second with an average transfer transaction cost of less than $0.005.

Optimism renamed as OP Mainnet, aims to create a “superchain”

* Layer2

Optimism has been renamed as OP Mainnet. This move aims to reflect its goal of creating a “superchain” composed of multiple L2 networks, with OP Mainnet serving as the foundational layer of the “superchain”. In addition, OP Labs, the developer of OP Mainnet, operates a development software stack called OP Stack, which enables developers to create their own L2 blockchains. Cryptocurrency exchange Coinbase is using OP Stack to develop its L2 network, Base.

Curve initiates proposal vote for adding WBTC collateral to crvUSD

* DeFi

The Curve community has initiated an on-chain vote for a proposal to add WBTC collateral to crvUSD with a cap of 200 million crvUSD. The proposal currently has 100% support and the voting will end on June 25.

Azuki launches Azuki Elementals, presale starts at 0:00 on June 28 Beijing time


NFT project Azuki will launch Azuki SBT series NFT Elementals on June 27. Azuki and BEANZ holders will receive one Soulbound Token (SBT) airdrop to commemorate the 2023 Follow The Rabbit event held at Hakkasan nightclub in Las Vegas. The Azuki Elementals presale will start at 0:00 on June 28 Beijing time.

French market regulator releases discussion paper on DeFi, expresses support for global DeFi rules

* Regulatory Compliance

According to CoinDesk, France’s top market regulator Autorité des Marchés Financiers (AMF) on Monday released a discussion paper on DeFi, expressing its desire to issue licenses to cryptocurrency exchanges operating in the country and sharing its “preliminary thoughts on the regulatory issues posed by the decentralized and ‘non-intermediated’ protocols that make up the DeFi ecosystem.” The AMF attempts to define DeFi, decentralized governance systems called DAOs, and automated “smart contracts” that run transactions. The paper also proposes related risks and control levels for debate.

UK House of Lords approves the Financial Services and Markets Bill that classifies cryptocurrencies as regulated activities

* Compliance and regulation

The UK House of Lords approved the Financial Services and Markets Bill (FSMB) on Monday, which classifies cryptocurrencies as regulated activities in the country and stablecoins as a form of payment. The FSMB will now return to the House of Commons to agree on the final version. Once both houses agree on the document, it will be sent to the King for approval and passed into law. The Bill can be passed back and forth between the two houses of Parliament until a consensus is reached.