The crux of the matter, Frye adds, is about NFT art wholesale and “using NFTs the way most people do: to sell them.” The point is to get SEC regulators to “think long and hard” about what falls within their jurisdiction, he says.
Safety versus art
In 1946, a U.S. Supreme Court decision involving the Howey Company, which sold citrus groves to buyers who shared in their profits, established the test for determining what constitutes a security. The “Howey Test” defines a security 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-related. “When you sell a certificate, you’re essentially selling art collectors a stake 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.
When you look at it that way and apply the Howey test, Gottlieb says, it can look a lot like art buyers are investing in a communal enterprise and expecting to profit from the artist's efforts. The difference, Gottlieb says, is that “artists don't owe you anything.” You might hope that your purchase of a signed Little Brother album will increase in value as Charli XCX continues to sell out concert venues, but that wasn’t promised with the record’s sale. The same, the lawsuit alleges, is true of a digital cat cartoon tied to a blockchain-based code.
What’s more, people aren’t just buying art NFTs to resell them for a profit. They’re buying Mann’s work, Gottlieb says, “for all sorts of reasons,” like simply enjoying the music itself. But drawing on the SEC’s Impact Theory and the Stoner Cat rulings, Frye argues that “not just the entire NFT market, but the entire art market itself is a certainty.”
Through a spokesperson, the SEC declined to comment. While the agency’s past actions don’t necessarily indicate that the SEC views all NFTs as securities, it also hasn’t provided a clear position on how artists who use the technology for sale should market their work. Mann’s work “may be sufficiently different” from the two projects that have paid fines to the SEC, said attorney Michael Rinaldi, a partner at Duane Morris in Philadelphia. If owners were holding on to an NFT because it was “collectible or unique … or for enjoyment, rather than as an investment, that would not be a security.”
Mann and Frye's lawsuit is intended to get some answers from the SEC. “Besides [Impact Theory and Stoner Cats’] digital nature, there was little conceptual difference between those series of artworks and, say, Andy Warhol's 1962 series of 32 Campbell's Soup Cansthe lawsuit says. The Stoner Cats NFTs funded an animated series, but what does buying art do for artists if it doesn’t fund their future work?
On the other hand, NFTs have a fundamentally monetary quality that other artistic mediums don’t. “Canvas is not a financial layer,” says London-based Ben Gentilli, who makes blockchain-related art under the name Robert Alice. NFTs, he says, are like “art made with banknotes.” When NFT art sales surged in 2021, as evidenced by the $69 million sale of a work by digital artist Beeple at Christie’s, the market highlighted the medium’s investment potential. “You saw that creep into the language of people marketing NFT projects,” Gentilli says.
