‘Song-A-Day’ Man artist Jonathan Mann and Law Professor Brian Frye have sued the SEC to help provide regulatory clarity for digital artists who use blockchain technology and NFTs.
Posted July 29, 2024 at 12:26 pm EST.
The crypto industry has been on the offense against the SEC as of late, and a new lawsuit by NFT artists takes the same tack.
Monday morning, two artists—musician Jonathan Mann, aka “Song a Day Mann,” and conceptual artist Brian L. Frye—have filed a complaint against the SEC wanting to know ahead of time whether the art they create using NFTs—visual art, music or videos—will be deemed a digital asset security before incurring prohibitive legal bills, SEC fines, or even having to destroy their artwork.
The lawsuit, which requests declaratory and injunctive relief against “unlawful enforcement actions” by the SEC, aims to prevent the agency from doing what it has done thus far with crypto: pursue enforcement actions against crypto players after the fact rather than set clear rules of the road ahead of time.
“Should artists have to ‘register’ their artwork before selling it to the general public? Should artists be forced to make public disclosures about the ‘risks’ of buying their art?” the complaint asks. “Should artists be required to comply with the federal securities laws, and the thousands of regulations and reams of interpretive guidance thereunder, just to offer their works to the public?”
Mann expounded on the reason for the lawsuit. “From my perspective, it’s just ludicrous to suggest, as I guess [SEC Chair] Gary Gensler has, that because [my songs] exist on a blockchain, there’s some kind of magical, ethereal process that they go through that suddenly makes them into a security.”
Frye concurred: ”The SEC hasn’t been properly challenged … this complaint puts the ball in the SEC’s court and forces them to reckon with the implications of their arguments.”
The SEC’s Previous Enforcement Actions Against NFT Projects
In late 2023, the SEC waded into whether NFTs could be deemed securities. The SEC found in two cease and desist settlement cases—Impact Theory and Stoner Cat Web Series—that the creators of these projects had conducted unregistered offerings of NFTs.
The SEC announced charges against and a settlement with Impact Theory, LLC, a media and entertainment company, for allegedly offering and selling unregistered securities in the form of their Founder’s Keys (“KeyNFTs”)—the SEC referred to them as “purported NFTs.” The SEC’s argument was that Impact Theory made public statements that called for potential investors to view a purchase of a KeyNFT as an investment whose value would rise. As part of the settlement, Impact Theory agreed to pay disgorgement of over $5 million and interest and penalties of around $1 million, plus destroy all the NFTs in their possession.
The SEC charged and settled with Stoner Cats 2, LLC for allegedly offering and selling securities in the form of Stoner Cats NFTs that provided exclusive access to the series and future content, with a resale royalty imposed on each trade. The SEC found that the NFTs were offered as investment contracts, again citing the 2.5% royalty as well as statements the SC2 team made “[tying] the success of the show to the value of the NFTs.”. The settlement included a civil monetary penalty and, again, the requirement to destroy all Stoner Cats NFTs in possession.
In both Stoner Cats and Impact Theory, dissenting Commissioners Hester Pierce and Mark Uyeda took issue with the SEC’s application of the Howey test, writing, in response to Stoner Cats, “Were we to apply the securities laws to physical collectibles in the same way we apply them to NFTs, artists’ creativity would wither in the shadow of legal ambiguity. … The fact that money is involved does not transform NFTs into securities.”
Read more: Mila Kunis’ Stoner Cats NFT Project Pays $1 Million to Settle SEC Charges
Seeking Clarity for NFT Artists
The complaint alleges that the Impact Theory and Stoner Cats cases show that the SEC believes NFT creators are offering and selling securities when they sell NFT art accompanied by statements about marketing and royalties while not making it clear which circumstances make sales of NFTs securities offerings. “Instead, the SEC has continued to obfuscate the issue,” the plaintiffs state, citing the fact that Gensler himself admitted in front of the House Financial Services Committee that a physical Pokemon card is not a security but that an NFT representing a physical card could be.
Watch more about royalties: Are NFT Royalties the Way? How to Build a Sustainable Creator Economy
The complaint gives the example that Taylor Swift sells concert tickets, albums, clothing, books and even guitars that all could be bought and sold on secondary markets at higher resale values the more famous she becomes. However, the complaint states, “It would be utterly nonsensical for the SEC to treat Taylor Swift tickets or collectibles as securities.” And yet, the plaintiffs say, the SEC’s actions against Impact Theory and Stoner Cats pose the questions of what the bounds are of the SEC’s authority in the world of art, thus “[casting] a pall over the digital art industry, artistic creation in America, and ultimately the overall American economy.”
The plaintiffs’ attorney, Jason Gottlieb, who recently scored a major upset against the SEC in the Debt Box decision that required the agency to pay $1.8 million in attorney fees, stated, “Art’s not just an investment, right? It is literally a reflection of human creativity and spirit, and … artwork and artistic expression, of course, are protected by the First Amendment.”
Zack Shapiro, Managing Partner at Rains, commented on the strategy of filing a complaint before either Mann or Frye issued their NFTs. “This has proven to be, so far, a good strategy for the industry. … I think there is no excuse for the lack of clarity [the SEC has] given so far, and I think it reflects a deliberately hostile stance that the SEC has taken towards the digital asset industry. It’s been a huge sort of waste of time and money. They absolutely owe the industry better guidance,” said Shapiro.
