Sheppard, Mullin, Richter & Hampton LLP 30 Rockefeller Plaza New York, New York 10112-0015 212.653.8700 main 212.653.8701 fax www.sheppardmullin.com

May 13, 2022

U.S. Securities and Exchange Commission
Division of Corporate Finance
100 F Street, NE
Washington, D.C. 20549
Attn: Kyle Wiley

Draft Registration Statement on Form S-1  

Submitted March 31, 2022  

CIK No. 0001895618

Dear Mr. Wiley:

This letter sets forth the responses of The NFT Gaming Company, Inc., a Delaware corporation (the “Company”), to the comments received from the Staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) on April 27, 2022 concerning the Company’s Draft Registration Statement on Form S-1 (File No. [    ]) filed with the Commission on March 31, 2022 (the “Registration Statement”).

References in the text of the responses herein to captions and page numbers refer to Amendment No. 1 to the Company’s Draft Registration Statement on Form S-1 (the “Amended Draft Registration Statement”), which is being filed herewith.

Draft Registration Statement on Form S-1
The Offering, page 3

Risk Factors, page 6

The sale of NFTs on our platform could be determined to be the unregistered sale of securities, page 15

Management's Discussion and Analysis, page 36

Liquidity, Capital Resources and Plan of Operations, page 38

Business, page 40

Intellectual Property, page 43

General

In making this determination, the Company has considered the nature and structure of the digital assets that will be making available on its Platform, as well as a number of other factors, including the provisions of U.S. federal securities laws, judicial precedent (such as the U.S. Supreme Court’s decisions in the SEC v. W.J. Howey Co., 328 U.S. 293 (1946) and the Reves v. Ernst & Young, 494 U.S. 56 (1990) cases, as well as the Federal District Court’s decision in the Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce Fenner & Smith, 756 F.2d 230 (2d Cir. 1985) case), the SEC’s Framework for Investment Contract Analysis of Digital Assets published by the Commission’s Strategic Hub for Innovation and Financial Technology¹ (“FinHub Framework”), and reports, orders, press releases, public statements and speeches by the SEC and its staff providing guidance on when a digital asset may be a security for purposes of the federal securities laws. Finally, the Company consulted with counsel and industry experts. Notwithstanding the foregoing conclusion, and due to the ongoing evolution and nature of digital assets and the views of regulatory authorities, including the statements by the Director of the Division of Corporation Finance (Digital Asset Transactions; When Howey met Gary (Plastic) (June 14, 2018)), the Company acknowledges that digital assets that it will be making available on the Platform may, in the future, be found by the SEC or a federal court to be securities notwithstanding the Company’s prior conclusion; and that the Company’s prior conclusion, even if reasonable under the circumstances, would not preclude subsequent legal or regulatory action.  

As requested, in reaching the forgoing conclusion, the Company is providing the following detailed legal analysis as to why its NFT business does not involve the offer and sale of securities within the meaning of Section 2(a)(1) the Securities Act of 1933, the offer and sale of which should not be registered under the Act.  

FACTUAL OVERVIEW:  

The NFTs   The Company is introducing new technology on its gaming platform (the “Platform”) in the form of in-game, non-fungible tokens (“NFTs”) in order to provide the users of the Platform the ability to augment their gaming experience with unique digital items such as skins and avatars. The NFTs can be utilized across the network of games and the Platform. All NFTs available for purchase on the Platform will be created and sold by the Company and third party game developers and will represent a single instance of a digital asset. All third party game developers shall create their NFTs through the Platform’s NFT infrastructure.  

All marketing of NFTs to be sold on the Platform will focus on the NFTs as enhancements to the games available on the Platform in the form of avatars and skins. The Company has no plan or intent to market or advertise the Platform’s NFT feature as investment vehicles and there will be no marketing suggesting that the value of the NFTs will appreciate in value. The Company has not and will not engage promoters, sponsors, or third parties whose marketing efforts are intended to drive price appreciation of the NFTs. All NFTs will only be sold for value in-game on the Platform at a low price point compared to the current market prices.  

The Platform  

The Platform is not a marketplace for NFTs as the Platform provides no mechanism for resale of the NFTs; it only provides users with the ability to purchase and mint NFTs for use within games that are offered for play on the Platform. The Platform will allow third-party game developers/publishers to onboard their games to the Platform and offer NFTs using the Company’s smart contracts for use in all of the games available on the Platform. The Platform is not designed to and does not intend to sell any other kind of digital assets other than NFTs designed to be used in-game, and, at any time, ownership of a NFT bought on the Platform will be held only by a single owner. For avoidance of doubt, the Company will not allow, at any time, the minting or the selling of NFTs owned by more than one person (i.e. it will not provide for shared ownership of an NFT) nor fractionalization of a single asset represented as multiple NFTs.  

In order to purchase an NFT, a user must link his or her digital wallet to the Platform. Once an NFT is purchased, that NFT will remain within such user’s digital wallet and as long as such user’s digital wallet is linked with the Platform the purchased NFT can be used in-game. At no point will the Company act as a custodian to any purchased NFTs. If a purchaser desires to transfer an NFT to a third party, they will have to do so via a third-party marketplace.  

The Royalties  

NFTs are unique as they have the ability to distribute royalties as payments that compensate original NFT creators for the use of their non-fungible tokens. The Company will receive a royalty, if and when a purchaser resells any of the NFTs, that were initially purchased on the Platform, to third-parties via a third-party marketplace that allows for the implementation of royalties, such as OpenSea or Rarible. The initial royalty fee for all minted NFTs will be set to a fixed rate at the market standard (i.e. approximately 5-10%) and the Company will reserve the right to vary such rate over time for subsequent NFTs depending on supply and demand factors. For avoidance of doubt, none of the NFTs represent a right for the NFT owner to receive any revenue. The Company will not, at any time, pool and distribute the royalties to its NFT holders. No matter how many secondary sales occur on third-party platforms, the royalties will only be payable to the Company or the third-party game developers, as appliable, that sell NFTs on the Platform.  

ANALYSIS:  

In considering whether U.S. federal securities laws apply to the offer, sale, or distribution of the NFTs on the Platform, the Company considered, as a threshold issue, whether the NFTs are a "security". The term "security" includes an "investment contract," as well as other instruments such as stocks, bonds, and transferable shares. A digital asset should be analyzed to determine whether it has the characteristics of any product that meets the definition of "security" under the federal securities laws. In this regard, both the Commission and the federal courts have frequently used the "investment contract" analysis to determine whether unique or novel instruments or arrangements, such as digital assets, are securities subject to the federal securities laws.  

The test to determine what constitutes an investment contract was articulated by the U.S. Supreme Court in SEC v. W. J. Howey Co. (“Howey”). Under Howey, an “investment contract” exists where all of the following factors are satisfied: (1) an investment of money; (2) in a common enterprise; and (3) with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. The focus of the Howey analysis is not only on the form and terms of the instrument itself but also on the circumstances surrounding the digital asset and the manner in which it is offered, sold, or resold (which includes secondary market sales).   

The first prong of the Howey test is unequivocally met. The SEC and several courts have held that, to meet the definition of a security, an investment of “money” need not be in the form of cash. SEC v. Shavers, No. 4:13-CV-416, 2014 WL 4652121, at *1 (E.D. Tex. Sept. 18, 2014). (holding that an investment of Bitcoin, a virtual currency, meets the first prong of Howey). Consequently, it is clear that the an offer and sale of an NFT involves investment of money because the NFT is purchased in exchange for value, whether in the form of fiat currency, cryptocurrency, or other type of consideration.  

The very nature of NFTs (i.e. non-fungibility) creates a high probability that the second prong of the Howey test is not met. Under this prong, a common enterprise exists where investment returns of digital asset purchasers are linked to each other or are dependent on the success of the promoter's efforts or expertise. Thus, if the value of an NFT is substantially connected to either the profits of a promoter or to those of other NFT holders, then such NFTs are more likely to be found to be a “common enterprise”.  

Here, each NFT represents a right for a single individual to own rights to a unique instance of a digital asset. Because there is a single owner of a unique instance of an item, there is neither commonality of interest between the various NFT owners nor the NFT owners and the issuer. To the extent that an NFT varies in value, it is based on market demand for that instance of the item from other collectors or purchasers. Therefore, purchasers of the NFTs on the Company’s Platform are not in a “common enterprise” because (i) each NFT is owned by a single owner, (ii) the secondary value of a purchased NFT is not tied to the success or failure of the Company, and (iii) there is no material dependence upon the managerial efforts or expertise of the Company.  

The third prong of the Howey test is not met because any appreciation in the value of a purchased NFT is not based on the efforts of the Company but rather market demand. In the Framework for Digital Assets, the FinHub lists several different characteristics of digital assets that could make such digital assets more likely to be investment contracts and further notes that no single factor is determinative; the more factors present, the more likely it is an investment contract. The inquiry, therefore, is an objective one, focused on the transaction itself and the manner in which the digital asset is offered and sold.  

One specified factor is that a digital asset is “not fully functional at the time of the offer or sale,” and purchasers would reasonably expect a sponsor, promoter, or other third party (referred to as an “Active Participant”) to “further develop the functionality” of the asset. Further, the notion of third-party efforts refers to work that is to be performed in the future rather than that which has already taken place in the past. At the time that any NFT is purchased and minted on the Platform, the NFTs will be able to be used in-game and be fully functional. The underlying smart contracts of the NFTs are written prior to the launch of the sale and cannot be mutated post-deployment; no further development of the NFTs by an Active Participant will be required after purchase for such NFT to have its full utility.  

A second specified factor is that the holder has the opportunity to realize gain or profit from the appreciation in the value of the digital asset “that comes, at least in part, from the operation, promotion, improvement, or other positive developments in the network, particularly if there is a secondary trading market that enables digital asset holders to resell their digital assets and realize gains”. As noted in the Framework for Digital Assets, “price appreciation resulting solely from external market forces (such as general inflationary trends or the economy) impacting the supply and demand for an underlying asset generally is not considered ‘profit’ under the Howey test.” Here, the NFTs are basically stand-alone products whose value is determined at a sale that is made directly to a buyer. Although a purchaser of a NFT may realize a profit by reselling such NFT for a gain in a secondary market, it must do so on a third-party marketplace as the Company does not provide any opportunity or mechanism for resale of the purchased NFTs. Any realization of profits from the resale of the NFTs will be as a result of supply and demand and other external market forces and will not be a direct result of any effort by the Company to increase the value of the NFTs, and a NFT is not defined as a security simply because it can increase in value.  

A third specified factor is that the digital asset is marketed in a manner that emphasizes the functionality of the digital asset, and not the potential for the increase in market value of the digital asset. In United Housing Foundation, regarding the third prong of the Howey test, the Supreme Court explained: “What distinguishes a security transaction—and what is absent here—is an investment where one parts with his money in the hope of receiving profits from the efforts of others, and not where he purchases a commodity for personal consumption or living quarters for personal use.” United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 858 (1975). Here, the Company’s intention behind offering the NFTs is for use in gaming to augment the purchasers’ gaming experience on the Platform. The NFTs will not be directly or indirectly marketed as investments or any type of speculative vehicle.  

Gary Plastic. Additionally, the Company does not believe that the Second Circuit’s holding in Gary Plastic is applicable to the Company’s business model. Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce Fenner & Smith, 756 F.2d 230 (2d Cir. 1985). The Second Circuit found securities laws applied because of the potential for profit from the existence of a secondary market advertised by an issuer for an instrument that was otherwise not a security. Referencing this ruling, the SEC reasoned that digital assets sold in an offering by promoters to “develop the enterprise” will most often be a security because the efforts of promoters are the primary source of value creation in the asset, and, that, Gary Plastics stands for the notion that marketing of ‘investments’ based, at least in part, on potential secondary market liquidity can cause an instrument to be deemed a security. However, the mere existence of a secondary market should not be dispositive as many networks require a form of secondary market to balance economic demands without any one actor having to play all roles (consumer, provider, etc.) on the network. See William Hinman, ‘Digital Asset Transactions: When Howey Met Gary (Plastic)’ (14 June 2018), www.sec. gov/news/speech/speech-hinman-061418.  

Here, there is no factual information to relate the Company’s actions to those of the issuer in Gary Plastic because (i) although there is a secondary market for the NFTs, the Company’s marketing strategy is to promote the NFTs as a way to increase a gamer’s gaming experience and does not promote the NFTs as speculative investment vehicles, (ii) the Platform does not physically provide opportunities for resale of the NFTs, and (iii) there are no promises of efforts by the Company to enhance the value of the NFTs.  

Royalties. A royalty is a legally binding payment made to an individual or company for the ongoing use of their assets, including copyrighted works, franchises, and natural resources. Here, the NFT royalties are payments, to the Company or to developers/publishers of third-party games on the Platform as creators of the NFT, for a copyright license being granted to the purchaser for the artwork underlying the NFT. Therefore, since the intellectual property is still owned by the creators of the NFTs, the royalty is simply a license fee back to the creators. and not a right for the purchaser to share in future additional payments.  

Conclusion:   For the foregoing reasons, the Company respectfully advises the Staff that its NFT business does not involve the offer and sale of securities within the meaning of Section 2(a)(1) the Securities Act of 1933, the offer and sale of which should not be registered under the Act.

If you have any questions relating to any of the foregoing, please contact Richard Friedman of Sheppard, Mullin, Richter & Hampton LLP at (212) 634-3031.