Casinos typically abhor clocks, but there is one ticking for Slotie. The online casino headquartered in the former Soviet republic of Georgia will run out of time as soon as Thursday to respond to four U.S. states that effectively booted it out of the country last month, claiming that its sales of nonfungible tokens (NFTs) to finance an international expansion were thinly disguised offerings of unlicensed securities.
In exchange for buying into a collection of 10,000 sloties, NFT that come with ownership of individualized avatars that look like the offspring of an eccentric slot machine and a manic robot, purchasers were to be entitled to a share of the profits from online gambling at Slotie’s parent company, Elia Software.
The online casino claimed that Slotie NFTs were sold out quickly when they were first launched on Dec. 7, 2021. But New Jersey’s cease and desist order said “there is no evidence on the blockchain of 10,000 Slotie NFTs selling out in under 5 minutes.”
Slotie had an average volume of sales for more than 300 ether, raising $1.3 million, according to Joe Rotunda, director of enforcement at the Texas state security board. The associated avatars depict a variety of slot-machine-based characters, from Roman legionnaires to pirates.
But after operating in the U.S. for about a year, the company found itself papered with cease-and-desist orders on Oct. 20 from four American states that accused it of selling unlicensed securities.
The casino closed its U.S. website eight days later. Other than a Twitter post that complained of “false acts and misinformation about Sloties” contained in the cease-and-desist notices and offering to discuss the matter with the federal Securities and Exchange Commission, Slotie has gone silent. Its main website, which offers NFTs to potential investors and casino games, has blocked access to people in the U.S. but remains available to consumers elsewhere.
Slotie may not have the resources to fight the orders, but the case raises interesting questions about U.S. attempts to exercise authority over foreign companies on the state and federal levels, and how far the governments will go to prevent American investors from taking advantage of investment opportunities overseas.
Slotie’s time to respond will be up officially on Thursday, which marks 28 days since the four states issued their orders, but an Alabama regulator says officials typically grant a few extra days in case of email delays.
Texas and Alabama security commissioners say they have not received responses from the company. “It’s not an excellent idea to miss the deadlines,” says Sean Griffin, a partner at law firm Dykema Gossett, since that would generally mean the company is giving up its right to challenge the orders.
Slotie did not respond to Forbes requests for comment sent to its social-media accounts and to Elia, its Tbilisi-based parent, but Griffin laid out three paths the company could take:
• Respond to the state orders and seek private hearings or challenge the regulators in court.
• Do nothing. Leave it up to the states to try to unwind previous NFT sales and wait to see if they approach the company to negotiate.
• Go off the grid, which Griffin says would be easy since there’s not much information on who is behind the company. Slotie could sell the same type of NFTs under a different name, though that could eventually lead the company into hot water if regulators find out.
The reference to the SEC in Slotie’s Oct. 28 tweet seems “shady” and a “weird way” to try to preempt the states’ action, says Griffin. He does not think the strategy has any chance of success.
Slotie wasn’t the first international digital casino to run afoul of state regulators, but its approach seems more refined than those of its predecessors. More than two states filed emergency orders against Sand Vegas Casino Club and Flamingo Casino Club in April and May respectively, for selling NFTs and promising investors shares of online-casino profits, while failing to provide any financial statements or warning of investment risks.
These two companies did not seem to be trying very hard. Aside from their obvious plays on the names of well-known U.S.-based casino-resort brands, they seemed to be offering NFTs primarily as funding mechanisms for online gambling operations they hoped to create. In the case of Sand, regulators alleged that the company outright lied to potential investors, telling them U.S. securities laws did not cover the NFTs and that further efforts could be made to obstruct regulation by changing the language used to describe the tokens and how profits would be paid to investors.
The companies seem to have returned to wherever they came from after being confronted by the regulators–Flamingo to Russia and Sand to Cyprus, Iceland or Arizona–both were cagey about their physical locations.
Slotie put more effort into its approach. It is an NFT project launched by Elia, an online gaming and casino software company, with over 120 online casino partners and producing more than 30 slot games.
“Holding a Slotie NFT can be seen as a partnership deal between holders, casinos and Elia Software,” Slotie announced in November 2021, said New Jersey’s order. “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.”
Members of the Slotie community can also join weekly lotteries, where they can win cash, free spins and new tokens. Current games are available as conventional internet sites, and the company is planning a blockchain-based version in the Sandbox metaverse.
But Slotie seems to have been unaware that it was expected to comply with the securities laws of the United States and individual states.
Usually, issues involving foreign entities fall under federal jurisdiction. But Joseph Borg, director of the Alabama securities commission says, “in the crypto and blockchain space the federal law is still sort of up in the air” and there’s no clear clarification of who has primary jurisdiction over this relatively new industry.
Vagueness regarding the regulation of NFTs and if they should be considered securities have the public paying close attention to what different commissions at the federal level will do to regulate future cryptocurrency projects.
“I think they are learning and they’ll discover that NFTs are an empty box.” says Jeremy Goldman, partner and co-chair of the blockchain technology group at Frankfurt Kurnit Klein & Selz, “And it’s really about what people are putting in that box. It would be a big mistake, and just wrong as a matter of law for anyone to cast a wide net and say that non-fungible tokens are securities. That would just be extremely misguided.”
In Slotie’s case, however, the four states seem to have decided that its NFTs are indeed securities. But how much jurisdiction does a U.S. state order have over an international metaverse company?
“It doesn’t matter where the party is operating from,” says Joe Rotunda, director of enforcement at Texas states securities enforcement, “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.”
Even though Slotie disabled access to its website for people in the U.S., residents can still find ways to buy its NFTs. Purchases are effected via smart contracts on the Ethereum
Meanwhile, Slotie’s Twitter account is still active, meaning the company is still directly or indirectly advertising to U.S. citizens that might want to try their luck with the casino tokens
But just because you can do something doesn’t necessarily mean you should. “I would recommend against buying these unregistered Slotie NFTs,” says Dykema Gossett’s Griffin. “These regulations exist for a reason, and the reason they exist is to prevent people from losing money. It’s like taking the seatbelt and airbags out of your car and driving 100 miles per hour.”