NFTs
NFT Artists Sue SEC to Prevent Regulation of Digital Art Sales
Two artists have sued the Securities and Exchange Commission to protect their digital artworks sold in the form of non-fungible tokens from regulatory oversight.
The SEC’s flawed interpretation of the U.S. Supreme Court’s 1946 decision in SEC v. W.J. Howey, which defined an investment contract, expands the agency’s power beyond what Congress authorized, the artists said. in a complaint filed Monday in the U.S. District Court for the Eastern District of Louisiana. The financial regulator applied Howey filed two lawsuits against NFT sellers last year, arguing in both cases that the sale of NFTs constituted an investment contract, the complaint notes.
But the SEC did not clarify when the sale of an NFT is considered a securities offering, the complaint said. “At this point, only a court can clarify the record,” the plaintiffs argued.
NFTs, first created in 2014, have a digital presence on a blockchain, which is a public ledger that records and verifies data, the complaint said. They are nonfungible, meaning the item is unique and indivisible, and can be encoded with rights, such as automatic royalty payments, according to the complaint. The tokens popularity exploded in 2021, including when Christie’s sold an NFT artwork for around $69 million.
The latest lawsuit was filed by Jonathan Mann, who sells music as NFTs on the Ethereum blockchain and holds the Guinness World Record for the most consecutive days writing a song, and University of Kentucky law professor Brian Frye, who creates artwork based on legal studies and sells it as NFTs.
The two artists are asking the court to rule that their upcoming NFT projects do not violate SEC rules and to preemptively block the SEC from filing a lawsuit against the artists for failing to register their projects with the agency.
Mann intends to sell more than 10,000 NFTs, each featuring a unique remix of one of his songs and a series of digital images, according to the complaint. He plans to receive royalties from each sale of the NFTs on a secondary market.
Frye intends to sell more than 10,000 digital editions of a conceptual artwork through Securities Art LLC with a 5% royalty on each resale of the artwork, the complaint said. The projects do not constitute investment contracts, according to the complaint.
The SEC did not immediately respond to a request for comment.
Phelps Dunbar LLP and Morrison Cohen LLP represent the artists.
The case is Mann vs. SECED La., Docket No. 2:24-cv-01881, 07/29/24.