In a recent development, law professor and filmmaker Brian Frye and songwriter Jonathon Mann have filed a lawsuit against the U.S. Securities and Exchange Commission (SEC). The lawyers argue that the SEC’s regulatory approach poses a threat to artists and creators experimenting with NFTs. They claim that NFTs should not be considered securities and that artists should not have to hire expensive securities lawyers to release their digital art. The plaintiffs are seeking clarity on whether NFTs fall under the SEC’s jurisdiction and what actions could trigger the application of securities laws to create and sell NFTs.
The lawsuit also references the SEC’s first case against NFTs involving media company Impact Theory. In 2021, Impact Theory launched the Founder’s Keys NFT collection, which the SEC later accused of promoting securities without registration. The company raised around $30 million through the sale of NFTs by presenting them as an investment opportunity. Impact Theory agreed to pay a $6.1 million fine and destroy the tokens, emphasizing the implications of failing to comply with securities laws when dealing with NFTs.
The SEC considers cryptocurrency a commodity and applies the Howey test to determine if tokens have security characteristics. All tokens in the U.S. must meet specific criteria set by the agency, such as fundraising and promises of ongoing project development, to avoid being classified as securities. Despite the SEC’s interest in NFTs, the market for non-fungible tokens has been on a downward trend, with sales volume declining significantly in the sector. This decline in interest raises questions about the future of NFTs and their regulation by the SEC.
The lawsuit against the SEC highlights the ambiguity surrounding the status of NFTs and the regulatory challenges faced by artists and creators in the digital art space. The SEC’s involvement in determining whether NFTs should be classified as securities adds an additional layer of complexity to an already evolving market. While the decline in interest in NFTs may impact their popularity, the threat of SEC regulation could have a lasting impact on the creativity and innovation seen in the blockchain and cryptocurrency space. Artists and creators are seeking clarity and guidance on how to navigate the regulatory landscape while continuing to push the boundaries of digital art creation through NFTs.
