Do artists have to file paperwork with the Securities and Exchange Commission (SEC) just to sell their work? Require buyers to be warned that the value of art can fluctuate Should it? Should the SEC determine whether the sale of art constitutes an “investment”? Does the SEC have the regulatory authority to police the sale of art? If so, they seem to think so.
as federal lawsuit In response to the SEC’s explanation, NFTs are digital tokens stored on a blockchain that “can confer a wide range of digital and/or physical rights on their holders.” Think of NFTs as digital collector items designed to be one-of-a-kind.
The plaintiff in that lawsuit, musician Jonathan Mann (who is listed online assongadayman) and conceptual artist Brian L. Frywants to continue selling NFTs, but is concerned that the SEC, led by Commissioner Gary Gensler, will try to stop them. Mann and Frye, who filed the lawsuit in the U.S. District Court for the Eastern District of Louisiana last July, were concerned by recent SEC actions against other NFT artists that resulted in punitive settlements. They are seeking an injunction to prevent the SEC from taking similar enforcement actions against them, arguing that this exceeds the SEC’s legal authority.
Mann and Frye said they are “understandably fearful” that the SEC will punish future NFT sales as “offerings of unregistered securities.” Under the Securities Act of 1933, the U.S. Supreme Court decided in a 1946 case SEC v. Howie“Securities” includes “any contract, transaction, or scheme entered into by a person.” [1] invest his money [2] In a general company, [3] But under the SEC’s broad definition, artists who hint that their work might become more valuable risk turning it into a “security” and becoming subject to the SEC. Regulation.
In 2023, the SEC fined two companies, Stoner Cats and Impact Theory, based on this understanding of the law. These cases resulted in settlements totaling over $1 million and $6 million, respectively.
Mann and Frey argue that the SEC’s enforcement action exceeded its statutory authority because these companies were being punished for selling digital artwork to the general public. “NFTs were not stock of a company and did not generate dividends of any kind or ongoing promise to generate profits for the purchaser,” the lawsuit states.
Other than the digital nature of their art, Mann and Fry believe there is little difference between their work and that of Andy Warhol, Pablo Picasso, or indeed any other artist. Artists often go on to build their careers and reputations in ways that benefit previous purchasers of their art, but that doesn’t require “contracts, transactions, or plans” to do so, as the SEC could require. That doesn’t mean they have, the lawsuit alleges. Registration and other regulatory hoop jumping.
In addition to fining Stoner Cats and Impact Theory, the SEC required that existing NFT art be destroyed. Two of the SEC’s five commissioners questioned whether the SEC was right, saying, “We routinely treat people who sell watches, paintings, and collectibles with vague promises of building a brand. No enforcement measures have been taken.” Opponents argue that the SEC’s settlements in these cases “create a precarious situation for artists and innovators, who regularly use funds from the sale of their art to monetize new projects and often sell their own art.” promote the work or play any other role to increase the commercial value of the work.” their art. ”
The SEC has not engaged in formal rulemaking to clarify its purported authority over NFTs. All Mann and Fry want to know is whether they can sell their art without risking SEC enforcement. They are seeking “federal court intervention to allow future art projects to be proposed and sold without subjecting them to costly SEC investigations.”
The SEC moved to dismiss the lawsuit in October. The agency has not made any demands against Mann or Frye so far, so it does not have standing to sue. The agency also argues that “sovereign immunity” precludes the lawsuit because “enforcement actions are within the express discretion of the Commission.”
This article was originally printed with the following heading: “The SEC’s Battle Against NFTs.”
