NFT Artists Sue SEC to Head Off Regulation of Digital Art Sales

Two artists sued the Securities and Exchange Commission to protect their digital artwork sold in the form of non-fungible tokens from regulatory oversight.

The SEC’s flawed interpretation of the US Supreme Court’s 1946 ruling 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 US District Court for the Eastern District of Louisiana. The financial regulator applied Howey in 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 hasn’t clarified when the sale of an NFT is considered a securities offering, the complaint said. “At this point, only a court can set the record straight,” 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 non-fungible, meaning the item is unique and indivisible, and they 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 about $69 million.

The latest suit was filed by Jonathan Mann, who sells songs as NFTs on the Ethereum blockchain and holds the Guinness World Record for most consecutive days writing a song, and University of Kentucky law professor Brian Frye, who creates artwork on legal scholarship and sells it as NFTs.

The two artists are asking the court to rule their upcoming NFT projects wouldn’t violate the SEC’s rules, and to preemptively block the SEC from bringing a lawsuit against the artists for failing to register their projects with the agency.

Mann intends to sell over 10,000 NFTs, each with a unique remix of one of his songs and a series of digital images, according to the complaint. He plans to receive a royalty 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 every resale of the artwork, the complaint said. The projects don’t constitute investment contracts, according to the complaint.

The SEC didn’t immediately respond to a request for comment.

Phelps Dunbar LLP and Morrison Cohen LLP represent the artists.

The case is Mann et al v. Securities and Exchange Commission et al, E.D. La., Docket No. 2:24-cv-01881, 7/29/24.