NFT Artists Take on SEC

A pair of NFT artists sued the U.S. Securities and Exchange Commission to seek a court's answer on whether non-fungible tokens fall under the agency's jurisdiction.

Law professor Brian Frye and "Song a Day Mann" songwriter Jonathan Mann filed the complaint against the SEC and its five commissioners on Monday in the U.S. District Court in the Eastern District of Louisiana. Lawyers for Frye and Mann accused the SEC of waging a "campaign to assert jurisdiction over digital art sales," citing two recent cases of the agency honing in on NFTs.

SEC's Recent NFT Actions

The SEC I brought its first NFT charges against the YouTube channel and podcast studio Impact Theory almost a year ago.

The agency said Impact Theory "encouraged potential investors to view the purchase of a Founders Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory were successful in its efforts" the SEC said. "The order finds that the NFTs offered and sold to investors were investment contracts and therefore securities."

A month later, the agency sued Stoner Cats 2 LLC for conducting an unregistered offering of NFTs that brought in $8 million from investors. Both lawsuits ended in settlements.

Artists' Concerns

"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 said in the complaint on Monday.

"Artists nationwide are suddenly confronted with the specter of the SEC attacking their distribution of visual or musical art as an unregistered securities offering," they added. Artists—both established artists and young upstarts—are suddenly faced with a bizarre question: Do they need to hire a securities lawyer just to sell their art?"

Seeking Judicial Clarity

The SEC declined to comment on the complaint. The SEC's previous NFT enforcement actions were settled, so courts have rarely had an opportunity to consider whether NFTs are securities, said Ashley Ebersole, general counsel at 0x Labs and former SEC lawyer.

The lawsuit points to a severe issue, Ebersole said. "SEC Chair Gensler has made expansive statements on crypto jurisdiction, and the agency has extracted settlements in past cases against NFT projects, so there's ample reason for NFT artists to be concerned and seek clarity," Ebersole said in an email.

Comparing with Taylor Swift

Are Taylor Swift tickets securities? Mann and Frye may differ from singer Taylor Swift "in many ways," but in terms of the complaint, they are "in the same position," lawyers representing the two said.

People who buy Swift's tickets and music could anticipate making a profit, and Swift herself makes promotional statements, releases new music, and "promotes aspects of her ecosystem," 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," the lawyers said.

Industry Reactions

Crypto executives and groups took to Twitter on Monday to support the complaint. "Wow," said Katherine Minarik, chief legal officer at Uniswap Labs, in a post on X. "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." The Blockchain Association asserted in a post that the SEC does not have authority over NFT art. "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," the group said on X.