The crux of the case, Frye adds, is about NFT art in general and “using NFTs the way most people do: to sell them.” The goal is to get SEC regulators to “think hard” about what falls under their purview, he says.
Security vs. Art
In 1946, a U.S. Supreme Court ruling on the Howey Company, which sold citrus groves to buyers who shared in the profits, solidified the test for determining what constitutes a security.Howey test” defines securities as “an investment of money in a common enterprise with the expectation of profit from the efforts of others.”
In other words, Gottlieb says, it turns an investment contract into a security. That can be tricky to apply to art, analog or NFT-affiliated. “When you sell a certificate, what you’re really doing is selling art collectors an interest in your art,” Frye says. That means buyers are investing with the expectation “that you’re going to become more famous.” That fame, in turn, makes the art more valuable.
If you look at it that way and apply the Howey test, Gottlieb says, it can seem like art buyers are investing in a common enterprise and hoping to profit from the artist’s efforts. The difference, Gottlieb says, is that “artists don’t owe you anything.” You can expect your purchase of an autographed work to be worth the money. Golf club The album’s value will rise as Charli XCX continues to sell out concerts, but that wasn’t promised with the sale of the record. The same, the suit argues, applies to a digital cartoon of a cat linked to blockchain-based code.
Moreover, people aren’t just buying art NFTs to resell for a profit. They buy Mann’s work, Gottlieb says, “for all sorts of reasons,” such as simply enjoying the music itself. But drawing on the theory of the impact of the SEC and the Stoner Cat rulings, Frye argues that “not just the entire NFT market but the entire art market itself is a security.”
Through a spokesperson, the SEC declined to comment. While the agency’s past actions don’t necessarily indicate that the SEC considers all NFTs to be securities, it also hasn’t provided a clear stance on how artists using the technology for sales should proceed with selling their work. Mann’s work “could be quite different” from the two projects that paid fines to the SEC, says attorney Michael Rinaldi, a partner at Duane Morris in Philadelphia. If owners are holding on to an NFT because it’s “collectible or unique … or for enjoyment, rather than as an investment, that wouldn’t be a security.”
Mann and Frye’s lawsuit aims to get some answers from the SEC. “Aside from the digital nature (of Impact Theory and Stoner Cats), there was little conceptual difference between those series of artworks and, for example, Andy Warhol’s 1962 series” of 32 Campbell’s Soup CansThe lawsuit claims. Stoner Cats NFTs funded an animated series, but what benefit does buying art bring to artists if it’s not to fund their future work?
On the other hand, NFTs have a fundamentally money-related nature that other art mediums don’t. “The canvas is not a financial layer,” says London-based Ben Gentilli, who creates blockchain-related art under the name Roberto AliceNFTs, he says, are like “if art was made out of banknotes.” When NFT art sales took off in 2021, exemplified by the sale of a work by digital artist Beeple for $69 million at Christie’s, the market highlighted the medium’s investment potential. “You could see that creeping into the language of people who were marketing NFT projects,” Gentilli says.
