NFTs
Does the SEC Really Have Jurisdiction Over NFT Art? Two Artists Sue the SEC for Answer
Two American artists filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) on Monday, seeking a declaratory judgment from a Louisiana court that their upcoming non-fungible token (NFT) projects would not violate U.S. securities laws.
The biting one complaintfiled in the notoriously anti-regulatory state’s Fifth Circuit jurisdiction, accuses the SEC of using two 2023 enforcement actions against NFT projects — Impact Theory and Stoner Cats — to assert its jurisdiction over the entire NFT industry without congressional authorization.
SEC Chairman Gary Gensler and the other four SEC commissioners — Hester Peirce, Caroline Crenshaw, Mark Uyeda and Jaime Lizarraga — as well as Eric Bustillo, regional director of the SEC’s Miami, Florida, office, are all named as defendants in the lawsuit.
According to Gensler, the complaint argues that the regulatory agency “took an overly broad view of its own authority in the digital asset context” and failed to provide clarity to NFT artists about the circumstances under which the offering and sale of NFTs could constitute offers or sales of securities.
And by drawing NFTs into its regulatory orbit through enforcement actions, the SEC has failed to meaningfully address the potentially far-reaching implications of applying securities laws to art, the complaint alleges.
An SEC representative declined to comment on the allegations in the lawsuit.
The specter of potential enforcement actions against NFT projects has “triggered a chilling effect on NFT artists around the world [U.S.],” according to the complaint. The plaintiffs in the case, conceptual artist and law professor Brian Frye and musical artist Jonathan Mann, also known as “Song a Day Mann,” are each holding onto a ready-to-go NFT project until a court grants them protection from the “credible threat” of a future SEC investigation or litigation, which their attorneys claim would be “economically devastating to [their] “artistic endeavors”.
But it’s not just small artists who are affected by the potential threat of SEC action: Large companies that offer NFT artwork have also struggled with the lack of regulatory clarity surrounding NFTs.
Just one day after Mann and Frye’s lawsuit was filed, American sports betting company DraftKings announced it was closing your NFT businesseffective immediately, citing “recent legal developments.” DraftKings is currently facing a class action lawsuit from investors alleging that its NFT sales violated securities laws. Last month, Dapper Labs — the company behind the popular NBA Top Shot “Moments” digital trading card — paid $4 million to settle its own securities class action lawsuit.
Frye and Mann’s lawsuit points to two recent SEC actions against other NFT projects, Impact Theory and Stoner Cats.
In August 2023, the SEC announced charges and a settlement with Impact Theory for allegedly offering and selling unregistered securities through its Founder’s Keys NFTs. Prior to its settlement with Impact Theory, the SEC had not issued any formal guidance on NFTs or taken any public action against any NFT creators.
As part of the settlement with the SEC, Impact Theory agreed to pay more than $6 million in restitution and civil penalties, as well as destroy all remaining Founder’s Keys NFTs in its possession.
“The SEC literally required artists to destroy their artwork as punishment for violating its unprecedented diktat that art is a security,” the plaintiffs’ attorneys argued. “That’s right: the United States federal government required an artist to destroy his art because a federal government agency determined that it was being offered or sold in violation of federal law.”
Two SEC commissioners, Pierce and Uyeda, issued a dissent against the SEC’s Impact Theory action, arguing that NFT sales did not constitute an investment contract and raised larger questions about NFT art that the SEC “should address before filing additional NFT cases.”
But a month later, in September 2023, the SEC announced charges and a settlement with another NFT project: this time, the company behind Stoner Catsa Mila Kunis-backed animated web series funded by NFT purchases, has agreed to pay a $1 million civil monetary penalty to the SEC to settle the charges. Like Impact Theory, the company also had to agree to destroy “all Stoner Cats NFTs in [its] possession, custody or control” within 10 days of the order.
Pierce and Uyeda disagreed again, writing: “If we applied securities laws to physical collectibles the same way we apply them to NFTs, artists’ creativity would wither in the shadow of legal ambiguity… The Commission’s application of securities laws here makes little sense and discourages content creators from exploring ways to leverage social media to create and distribute content.”
By going after Impact Theory and Stoner Cats, the plaintiffs argue that the SEC “sent a message…that it regulates digital art markets and perhaps even the art market as a whole,” thereby creating a “precarious situation for artists and innovators” like Frye and Mann.
“Accordingly, Mann and Frye require federal court intervention so that they can offer and sell their future art projects without facing an extremely costly SEC investigation, or an administrative or judicial action that could require them — as the Stoner Cats and Impact Theory settlements did — to literally destroy their own digital art to satisfy the SEC’s wrath.”
According to court documents, Frye has in the past contacted the SEC to request a no-action letter for two of his other NFT projects. He has not received a response.
Several other companies and entities have recently filed similar preemptive lawsuits against the SEC, largely within the same circuit. ConsenSys sought an injunction to prevent the SEC from suing it and declaring Ethereum a security; the Blockchain Association sued the SEC over the definition of “dealer”; a company called Beba and the DeFi Education Fund sued over potential SEC action; and a cryptocurrency company sued to launch a trading platform called “Ethereum.”Legitimate Exchange.”