The Lawsuit Challenges the SEC’s Authority Over NFTs
In a significant legal development, two artists have filed a lawsuit against the United States Securities and Exchange Commission (SEC) seeking judicial clarification on whether the agency has authority over non-fungible tokens (NFTs). Artist and law professor Brian Frye and songwriter Jonathan Mann, known as “Song a Day Mann,” initiated the complaint on Monday in the U.S. District Court for the Eastern District of Louisiana, targeting the SEC and its five commissioners.
Inquiry on NFT Registration and Risk Disclosure
Central to the lawsuit is their inquiry on whether artists need to register their NFT artworks with the SEC prior to public sale and if they are required to disclose any risks associated with purchasing their digital creations. The plaintiffs’ attorneys have drawn a notable comparison to Taylor Swift concert tickets to underscore their argument. They contend that, similar to NFTs, Swift’s tickets are resold in secondary markets and promoted by the artist herself. Yet, they argue, it would be unreasonable for the SEC to classify Swift’s tickets or collectibles as securities, highlighting the potential overreach of the SEC’s regulatory authority.
Seeking Declaratory and Injunctive Relief
The lawsuit seeks declaratory and injunctive relief to prevent what the plaintiffs describe as “unlawful enforcement actions” by the SEC against NFT projects. This legal action reflects a growing apprehension among artists regarding the SEC’s position on digital art. True to his brand, Jonathan Mann has released a song entitled “I’m Suing the SEC” and has put an NFT of the musical number up for auction.
Previous SEC Actions Against NFT Projects
Notably, the SEC’s first significant enforcement action against an NFT project occurred nearly a year ago, targeting Impact Theory, a YouTube channel and podcast studio. The SEC accused Impact Theory of marketing its “Founders Key” NFTs as investment opportunities, suggesting that buyers could profit if the business succeeded. Consequently, the SEC classified the NFTs as investment contracts subject to securities regulations. This case was settled with Impact Theory agreeing to certain penalties. Following this, the SEC took action against Stoner Cats 2 LLC, alleging an unregistered NFT offering that raised $8 million, which also ended in a settlement.
The SEC’s Approach Jeopardizes Artistic Innovation
“The SEC’s approach threatens the livelihoods of artists and creators that are simply experimenting with a novel, fast-growing technology or have chosen it as their preferred medium,” lawyers for Frye and Mann stated in the complaint. The complaint states, “Artists nationwide are suddenly confronted with the spectre of the SEC attacking their distribution of visual or musical art as an unregistered securities offering. The SEC’s approach jeopardizes the creative freedom and financial stability of artists experimenting with novel, rapidly evolving technology.”
The Lawsuit Draws Comparisons to Taylor Swift’s Art Sales
The lawsuit also drew an interesting comparison to singer Taylor Swift, as their lawyers argued that, like Swift’s fans, who might profit from buying her tickets or music, NFT buyers could anticipate making a profit. They questioned the logic of classifying NFTs as securities and raised concerns about the potential for artists’ works to be deemed securities, drawing a parallel to the SEC’s treatment of NFTs from Impact Theory and SC2. The lawyers said, “Imagine if the SEC found that Taylor Swift songs or collectibles were securities (or were securities if merely released in NFT form), and ordered them to be destroyed. It sounds farfetched. But that is exactly what has happened to Impact Theory and SC2.”
Reactions from the Web3 Community
The lawsuit has sparked significant reactions within the Web3 community. Katherine Minarik, chief legal officer at Uniswap Labs, criticized the SEC’s approach as arbitrary and unlawful, emphasizing the need for artists to protect their livelihoods. “We have reached the point where the SEC’s application of securities laws is so arbitrary and unlawful that artists are compelled to sue the SEC directly in order to protect their livelihoods. The SEC is broken,” Minarik posted on X (formerly Twitter).
Support from the Blockchain Association
The Blockchain Association also supported the complaint, asserting that the SEC does not have authority over NFT art and should not expect artists to navigate complex securities laws when selling their creations. The group stated on X that “it is unreasonable to expect musicians, designers, and other artists to hire lawyers to weigh in on whether art sales will be considered a securities offering by the SEC.”
