Two artists have filed a lawsuit against the US SEC in a Louisiana court seeking declaratory relief that would protect their upcoming NFT projects from SEC regulatory action.
They say the SEC has set a troubling precedent for potential regulatory overreach by filing charges against two other NFT art projects.
Two American artists filed suit against the US Securities and Exchange Commission (SEC) on Monday, seeking a declaratory judgment from a Louisiana court that their upcoming non-fungible token (NFT) projects would not violate US securities laws .
The scathing complaint, filed in the jurisdiction of the notoriously anti-regulatory state Fifth Circuit, accuses the SEC of using two 2023 enforcement actions against NFT projects – Impact Theory and Stoner Cats – to advance its jurisdictional claim over the entire NFT industry. without the consent of Congress.
SEC Chairman Gary Gensler and the four other SEC commissioners – Hester Peirce, Caroline Crenshaw, Mark Uyeda and Jaime Lizarraga – as well as Eric Bustillo, regional director of the SEC’s Miami, Florida office, are all named as defendants in the lawsuit.
According to Gensler, the complaint states, the regulatory agency has “an extremely expansive view of its own authority in the context of digital assets” and has failed to provide clarity to NFT artists about the circumstances in which the supply and sale of NFTs could be securities. offers or sales.
And by bringing NFTs into its regulatory purview through enforcement actions, the SEC has failed to meaningfully grapple with the potentially far-reaching implications of applying securities laws to art, the complaint alleges.
An SEC representative declined to comment on the allegations in the lawsuit.
The specter of possible enforcement actions against NFT projects has “unleashed a chilling effect on NFT artists around the world [U.S.]” the complaint said. The plaintiffs in the case, conceptual artist and law professor Brian Frye, and music artist Jonathan Mann, also known as “Song a Day Mann,” are each holding back a ready-made NFT project until a court grants them protection from the “ credible threat” of a future investigation or lawsuit by the SEC, which their lawyers claim would be “economically devastating to [their] artistic endeavors.”
But it’s not just small artists who are affected by the potential threat of SEC action; Major companies offering NFT artworks have also struggled with the lack of regulatory clarity surrounding NFTs.
Just one day after the lawsuit against Mann and Frye was filed, US sports betting company DraftKings announced it would close its NFT business with immediate effect, citing “recent legal developments.” DraftKings is currently facing a class action lawsuit from investors who claim its NFT sales violate securities laws. Last month, Dapper Labs – the company behind the popular NBA Top Shot “Moments” digital trading card – paid $4 million to settle its own class action securities lawsuit.
As for regulatory precedent
Frye and Mann’s lawsuit highlights two recent SEC enforcement actions against other NFT projects, Impact Theory and Stoner Cats.
In August 2023, the SEC announced charges and a settlement with Impact Theory for allegedly offering and selling unregistered securities through their Founder’s Keys NFTs. Prior to the settlement with Impact Theory, the SEC had not issued any formal guidance regarding NFTs or taken any public action against NFT creators.
As part of the settlement with the SEC, Impact Theory agreed to pay more than $6 million in disgorgement and civil penalties, and to destroy all remaining Founder’s Keys NFTs in its possession.
“The SEC literally demanded that artists destroy their art as punishment for violating the unprecedented dictate that art was a security,” the plaintiffs’ attorneys argued. “That’s right: The United States federal government required an artist to destroy his art because an agency of the federal government determined it was being offered or sold in violation of federal law.”
Two SEC commissioners, Pierce and Uyeda, had dissented from the SEC’s Impact Theory action, arguing that the NFT sales did not constitute an investment contract and raising larger questions about NFT art that the SEC “should address before filing new NFT cases.”
But a month later, in September 2023, the SEC announced charges and a settlement with another NFT project: this time, the company behind Stoner Cats, a Mila Kunis-backed animated series funded by NFT purchases, agreed to pay a civil penalty of $1 million to be paid. fine the SEC to settle the charges. Like Impact Theory, the company also had to agree to “purchase all Stoner Cats NFTs [its] possession, custody or control” within 10 days of the order.
Pierce and Uyeda again disagreed, writing: “If we applied the securities laws to physical collectibles the same way we apply them to NFTs, artists’ creativity would languish in the shadow of legal ambiguity… The Application of the Commission’s securities laws makes little sense here and discourages content creators from exploring ways to use social networks to create and distribute content.”
By going after Impact Theory and Stoner Cats, the plaintiffs argue, the SEC has “sent a message… that it regulates the digital art markets, and perhaps even the art market as a whole,” creating a “precarious situation for artists and innovators created”. ‘like Frye and Mann.
“Accordingly, Mann and Frye need federal court intervention to be able to list and sell their future art projects without facing a hugely expensive SEC investigation, or an administrative or judicial action that could require them to do so – like the Stoner Cats and made Impact Theory settlements. – literally destroying their own digital art to satisfy the wrath of the SEC.”
According to court documents, Frye has contacted the SEC in the past to request a no-action letter for two of his other NFT projects. He got no answer.
A number of other companies and entities have recently filed similar preemptive lawsuits against the SEC, largely within the same circuit. ConsenSys sought injunctive relief to prevent the SEC from suing the SEC and declaring Ethereum a security; the Blockchain Association filed a lawsuit over the SEC’s definition of a “dealer”; a company called Beba and the DeFi Education Fund have filed a lawsuit against possible SEC actions and a crypto company has filed a lawsuit to launch a trading platform called “Legit.Exchange.”