Frye added that the whole point of the lawsuit is to take NFT art broadly and “use it to sell NFTs, which is what most people are doing.” The point, he said, is to force SEC regulators to “think long and hard” about the scope of their jurisdiction.
Security vs. Art
In 1946, the U.S. Supreme Court solidified the standard for determining what constitutes a security in its decision regarding Howey Corporation, which sold citrus groves to buyers and distributed the profits. The “Howey test” defines a security as “the investment of money in a common enterprise with the expectation of profiting from the efforts of others.”
In other words, you’re securitizing an investment contract, Gottlieb says. Applying this to analog or NFT-related art can be tricky. “When you sell securities, you’re essentially selling the rights to your art to art collectors,” Frye says. In other words, the buyer is investing in the hope that you’ll become more famous, which in turn will make the art more valuable.
Thinking about it that way, Gottlieb says, and applying the Howey test, it seems like art buyers are investing in a common enterprise and expecting to benefit from the artist’s efforts. The difference, Gottlieb says, is that “the artist doesn’t owe you anything.” If you buy signed art, Brat As Charlie XCX’s concert venues continue to sell out, the value of the album will likely rise, but that’s not what record sales promise. The same can be said for the digital cat cartoons tied to the blockchain-based code, the lawsuit alleges.
Moreover, people aren’t just buying art NFTs to resell at a profit: Gottlieb said people buy Mann’s work for “a variety of reasons,” including to enjoy the music itself. But based on the SEC’s impact theory and the StonerCat ruling, Frye argues that “the entire art market, not just the entire NFT market, is a security.”
The SEC declined to comment through a spokesperson. The SEC’s past actions don’t necessarily indicate it considers all NFTs securities, but it also hasn’t taken a clear stance on how artists who use the technology to sell their work should proceed. Mann’s work “may be sufficiently different” from the two projects that paid the SEC fine, said Michael Rinaldi, a partner at Duane Morris in Philadelphia. If an owner holds an NFT “because it’s collectible or unique, or for fun rather than an investment,” it wouldn’t be a security.
Mann and Fry’s lawsuit aims to get some answers from the SEC: “Other than their digital nature, there is little conceptual difference between these bodies of work and, for example, Andy Warhol’s 1962 series of 32 paintings.” Campbell’s Soup Cans“The Stoner Cats NFTs helped fund the animated series, but what good does purchasing art do to an artist if it doesn’t fund their future work?
Still, NFTs have a fundamentally money-related quality that other artistic mediums don’t. “The canvas is not a financial layer,” says London-based Ben Gentili, who makes blockchain-related art under the name Robert Allis. NFTs, he says, are like “if art was made with paper money.” When NFT art sales surged in 2021, citing the $69 million sale of a work by digital artist Beeple at Christie’s, the market highlighted the medium’s investment potential. “You see it creeping into the language of people marketing NFT projects,” Gentili says.