Login | September 29, 2024
Are music and art NFTs securities? Inquiring minds want to know
RICHARD WEINER
Technology for Lawyers
Published: September 27, 2024
Is selling a work of art or a song a securities offering?
A musician and a conceptual artist/law professor have filed a suit against the SEC seeking a declaratory judgment that their upcoming NFT offerings will not constitute securities offerings.
And let the fun commence. NFTs, which stands for “non-fungible tokens,” are a hot item right now.
The artists are songwriter Jonathan Mann and conceptual artist Brian L. Frye. Mann’s project involves releasing over 10,000 NFTs of remixes of his song “This Song is a Security.” Frye plans to offer for sale over 10,000 NFTs representing ownership shares in his conceptual art. They both have no idea if these releases will be considered to be securities by the SEC.
The SEC has taken the position that “some” NFT sales constitute securities transactions under the Howey test, particularly when an issuing statement indicates that the NFT may increase in value after sale, and it has ruled that several other artist NFT sales have constituted securities sales.
Plaintiffs here are arguing that artist NFTs do not meet the part of Howey that requires an investment in a common enterprise with the expectation of a profit. Plaintiffs further argue that there the SEC has no clear Congressional authorization to declare NFTs as securities such that the agency would be able to make this determination.
Furthermore, the artists argue that any SEC ruling about their art being a security would have a chilling effect on what is essentially a new art form.
Other NFT creators are also bringing various actions against the SEC on similar grounds, including blockchain software creator Consensus Software, Inc., blockchain industry associations Crypto Freedom Alliance of Texas and Blockchain Association, and decentralized exchange LEJILEX.
Here’s hoping that the court can clear all of this up with one simple declaratory judgment. No other kind of art is subject to a securities analysis that I know of. Just because this art sits on a blockchain doesn’t mean that it’s any different from my friend’s new album or drawing. Right?
Nobody knows.
Thanks for the analysis to Gary DeWaal and Alexander C. Kim of Katten Munchin Rosenman LLP.