Law professor and filmmaker Bryan Fry and songwriter Jonathan Mann have filed a lawsuit against the U.S. Securities and Exchange Commission.
Lawyers argue that the SEC’s approach to regulation threatens the livelihoods of artists and creators experimenting with NFTs.
Proud to represent my client and friend Jonathan Mann @songadaymann in his courageous and unfortunately necessary lawsuit against the SEC.
Art is not a security, and digital musicians should not have to hire expensive securities lawyers just to release music. https://t.co/FBYL9FZZfG
— Jason Gottlieb (@ohaiom) July 29, 2024
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What the lawsuit says
According to the document, the plaintiffs want to determine whether NFTs fall under the regulator’s jurisdiction. The lawyers asked the SEC to answer what actions could lead to the application of securities laws to the creation and sale of NFTs. The lawsuit also asks for information about registering NFTs before they can be sold.
“Two recent administrative decisions by the SEC indicate that the SEC is intervening in the art world by determining when artworks must be registered with the federal government before they can be sold.”
The authors of the document compared non-fungible tokens to Taylor Swift concert tickets, which are often resold on the secondary market. Mann and Frey are in exactly the same position in this lawsuit. The lawyers argue that it would be absurd for the SEC to classify such tickets or collectibles as securities:
“They are artists and they want to create and sell their digital art without being investigated by the SEC or being sued.”
SEC’s First Lawsuit Against NFTs
In 2021, media company Impact Theory released the Founder’s Keys NFT collection. The company promoted the project from October to December 2021. The collection included tokens of three different rarity levels.
As a result, in August 2023, the SEC charged Impact Theory with promoting securities without registration. The company used NFTs to attract investors, raising about $30 million. It was the regulator’s first case against NFTs.
Today, we charged Impact Theory LLC, a Los Angeles-based media and entertainment company, with conducting an unregistered securities offering of crypto assets in the form of purported NFTs. Impact Theory raised approximately $30 million from hundreds of investors.
— U.S. Securities and Exchange Commission (@SECGov) August 28, 2023
The SEC believes that the company positioned the project as an investment in business. In particular, it guaranteed holders high profits and promised extensive prospects.
Thus, the regulator considered that the specified NFCs have the characteristics of an investment agreement and, as a result, are classified as securities. By facilitating the collection, the company violated federal laws in this industry.
Impact Theory agreed to pay a fine of $6.1 million, without admitting or denying guilt. They also agreed to destroy the tokens and their references from websites and social media.
What is considered a security by the SEC?
The Commodity Futures Trading Commission considers cryptocurrency to be a commodity. The regulator proposes to apply the tax regime designed for commodities to cryptocurrency and to treat the actions of issuers as producers of commodities. However, in the US, there are no rules obliging issuers to register tokens as commodities.
When assessing the status of cryptocurrencies, the SEC appeals to the Howey test.
The regulator views the new financial instrument as having security characteristics and believes that cryptocurrency falls within the scope of its legislation.
According to the SEC, all tokens, in one way or another, fall under several criteria outlined by the agency: a pre-sale or fundraising, promises to improve the project through ongoing business development and marketing, and the use of social media to demonstrate the capabilities and benefits of the project.
However, no arbitration body has been able to resolve the dispute between the two US regulators, so each agency is acting based on its own view of the situation.
Traders are losing interest in NFTs, but regulators are not
Despite regulators’ interest in non-fungible tokens, the NFT hype continues to wane. In July, NFT sales totaled $395.5 million, according to CryptoSlam. That’s a new low since November 2023.
The NFT sector has been in a downward trend for some time now. Sales volume and the number of unique buyers and sellers have been steadily declining since March 2024.
In addition, sales volume in the second quarter of 2024 decreased by 45% compared to the first quarter – $2.2 billion against $4.1 billion.
The July decline began in the middle of the month. However, in early July there were signs of a recovery in sales volumes after a significant drop in June. In this case, July became the third-largest month in terms of transaction volume in 2023.
There were 9.9 million transactions recorded during the period, up from 5.7 million in June. However, this is hardly a positive sign, as the average sale price in July hit a new low since September 2023 at $39.56.
What’s Threatening NFTs: SEC or Declining Interest
The status of non-fungible tokens has yet to be determined, according to the latest lawsuit against the SEC. However, the regulator is showing less and less interest in this area due to the fading excitement around NFTs.
Either way, the SEC’s approach to regulation threatens NFTs, which were originally intended to be a creative element throughout the blockchain and cryptocurrency space.
