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In a landmark legal challenge, two artists filed a lawsuit against the United States Securities and Exchange Commission (SEC) today (July 29) to seek judicial clarification on whether the agency has authority over NFTs.
Brian Frye, a law professor and filmmaker, and Jonathan Mann, a songwriter known on social media as “Song a Day Mann,” are the plaintiffs in this case. They are requesting the court to specify what actions involving NFT creation and sales might invoke U.S. securities laws. Central to their inquiry is whether artists need to register their NFT artworks with the SEC prior to public sale and if they are required to disclose any risks associated with purchasing their digital creations.
The attorneys representing Frye and Mann have drawn a notable comparison to Taylor Swift concert tickets to underscore their argument. They contend that, similar to NFTs, Swift’s tickets are resold in secondary markets and promoted by the artist herself. Yet, they argue, it would be unreasonable for the SEC to classify Swift’s tickets or collectibles as securities, highlighting the potential overreach of the SEC’s regulatory authority.
Filed in the U.S. District Court for the Eastern District of Louisiana, the lawsuit seeks declaratory and injunctive relief to prevent what the plaintiffs describe as “unlawful enforcement actions” by the SEC against NFT projects. This legal action reflects a growing apprehension among artists regarding the SEC’s position on digital art.
True to his brand, Mann has released a song entitled “I’m Suing the SEC” and has put an NFT of the musical number up for auction.
The SEC’s first significant enforcement action against an NFT project occurred nearly a year ago, targeting Impact Theory, a YouTube channel and podcast studio. The SEC accused Impact Theory of marketing its “Founders Key” NFTs as investment opportunities, suggesting that buyers could profit if the business succeeded. Consequently, the SEC classified the NFTs as investment contracts subject to securities regulations. This case was settled with Impact Theory agreeing to certain penalties.
Following the Impact Theory case, the SEC took action against Stoner Cats 2 LLC, alleging an unregistered NFT offering that raised $8 million. This lawsuit also ended in a settlement, avoiding a court ruling on whether NFTs are considered securities.
The lawsuit filed by Frye and Mann argues that the SEC’s actions threaten the livelihoods of artists who are exploring new technological mediums. Their attorneys stress that artists now face the daunting task of possibly needing legal counsel to ensure their NFT sales do not violate securities laws. “The SEC’s approach jeopardizes the creative freedom and financial stability of artists experimenting with novel, rapidly evolving technology,” the complaint states.
In a provocative analogy, the plaintiffs’ attorneys compared their situation to that of the music industry, specifically mentioning Taylor Swift. They argue that fans who purchase Swift’s tickets or music might anticipate profits, and Swift actively promotes her releases. The attorneys warn that such an interpretation of securities law, if applied broadly, could be both absurd and damaging.
The lawsuit has sparked significant reactions within the web3 community. Katherine Minarik, chief legal officer at Uniswap Labs, expressed her support on social media, condemning the SEC’s approach as arbitrary and unlawful.
“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,” she wrote. “The SEC is broken.”
“It’s a shame it had to come to this,” attorney Ariel Givner weighed in. “I do not hate the SEC, nor do I have any ill will towards the agency. I am, however, deeply frustrated by their current lack of regulatory clarity regarding digital assets and cryptocurrency as securities. Despite numerous requests and even lawsuits seeking guidance, the SEC has yet to provide the necessary direction. This ambiguity makes it challenging for those of us in the industry who are striving to innovate and improve the space.”
Editor’s note: This article was written by an nft now staff member in collaboration with OpenAI’s GPT-4o.
