Two artists have initiated a lawsuit against the United States Securities and Exchange Commission (SEC) to establish whether non-fungible tokens (NFTs) are subject to the commission’s jurisdiction. This legal action stems from the need for clear guidelines on the treatment of NFTs as securities under U.S. law.
The Plaintiffs and Their Concerns
The lawsuit has been brought forth by Brian Frye, a law professor and filmmaker, and Jonathon Mann, a songwriter. Both plaintiffs are seeking legal clarification on specific actions that might subject NFT creators to securities regulations. Their attorneys have raised questions about the necessity for artists to register their NFT art prior to public sales and the requirement to disclose potential risks associated with purchasing these digital assets.
| Question | Description |
|---|---|
| Do artists need to register NFT art before sales? | Clarification on registration requirements for public sale |
| Must artists disclose risks of buying NFTs? | Inquiry about mandatory risk disclosures for buyers |
The Argument Against Treating NFTs as Securities
Using Taylor Swift’s concert tickets as a metaphor, the attorneys argued that it would be unreasonable for the SEC to classify NFTs as securities. Swift’s tickets are sold and resold on secondary markets, and she promotes these events—yet, it would be nonsensical for such tickets or collectibles to be considered securities.
The lawsuit contends that like Swift, artists such as Mann and Frye seek to sell their digital creations without the fear of SEC investigations or lawsuits. This comparison aims to illustrate the absurdity of potentially regulating NFTs as securities, which could severely impact artists who use this medium to express their creativity.
The SEC previously filed a case against the YouTube channel and podcast, Impact Theory, in August of the previous year. The commission argued that the channel promoted its Founders Key NFTs as investments, suggesting that buyers could expect profits, which aligns with the characteristics of a security.
However, Mann and Frye’s attorneys strongly oppose such a viewpoint, highlighting the drastic implications if everyday artistic outputs were deemed securities, especially if released in NFT format. They argue this could lead to unwarranted actions like the destruction of digital artworks, drawing a parallel to the case against Impact Theory and the SC2 project.
Potential Impacts on Artists and the Creative Industry
The legal team emphasized the threat this regulatory uncertainty poses to artists and creators who are either experimenting with blockchain technology or have adopted it as their primary medium of expression. The lack of clear regulations could stifle innovation and restrict artistic freedom in the burgeoning field of digital art.
In seeking to protect their rights and clarify the regulatory landscape, Frye and Mann have requested both declaratory and injunctive relief from the court. This would prevent the SEC from taking what they consider to be unlawful enforcement actions against their and potentially other NFT projects.
As the case unfolds, it will be closely watched by both legal experts and the broader NFT community, as its outcome could set significant precedents for the regulation of digital assets and their classification as securities within the United States.
Featured image credit: Freepik
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