CyberKongz Faces SEC Lawsuit after Years of ‘Living in Fear’

CyberKongz has become the second Web3 gaming company in as many months to be hit with a warning letter from the Securities and Exchange Commission that a lawsuit may be coming.

The letter, called a Wells Notice, is a formal notice that the SEC is investigating the firm and may take action against it for failing to register its Genesis Kongz NFTs as securities.

Despite its small size and lack of VC funding, the CyberKongz team has promised to fight the suit, saying it is “increasingly apparent that the current administration is trying to force their anti-crypto agenda at the last minute.”

It added that the April 2021 “sale” the SEC was investigating was actually a contract migration, meaning an exchange of tokens without any proceeds being raised.

If the agency can’t tell the difference, “what hope do we currently have for a clear regulatory pathway going forward?” CyberKongz said.

Under the chairmanship of Gary Gensler, the SEC has aggressively pursued a policy that the crypto industry calls regulation by enforcement, labeling virtually all cryptocurrencies except Bitcoin and, recently, Ether as securities that must be registered with the agency before a public sale.

Gensler’s announcement that he would resign from the Commission on President Donald Trump’s inauguration day was met with widespread relief from the crypto industry as a whole.

The coming changes in the SEC’s leadership under a pro-crypto Trump administration make it likely that charges will not be filed, or at least not followed through on, something CyberKongz hopes for.

Nonetheless, CyberKongz said in an X post that they have been “suffering in silence and working in fear” for two years after the SEC revealed it was investigating the company.

Hardly Alone

Another of the SEC’s most recent targets is Web3 gaming firm Immutable, which received a Wells Notice on Oct. 31 based on its 2021 IMX token listing. Like CyberKongz, Immutable said it received little outreach from the SEC and plans to fight any enforcement action.

“To manufacture a case on a [token] listing that occurred in 2021, with practically no direct communication with the company, is precisely the reason the industry is so skeptical of any attempts from this SEC to argue it is attempting to provide clarity,” Immutable said.

All of this comes with a cost. Last month, the Blockchain Association revealed that the cryptocurrency industry spent $429 million defending itself against more than 100 SEC lawsuits through the end of 2023.

“Every Web3 company has to reserve assets to handle aggressive and often unfounded inquiries from the SEC,” said Greg Xethalis, general counsel of venture capital firm Multicoin Capital, of Immutable’s troubles.

“This is another example of aggressive enforcement that will divert money from good, American engineering jobs into large legal bills and a waste of resources for the courts, the SEC and Immutable,” he added.