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I guess the dog days of August have officially arrived when the news is so slow that I find myself blogging about Non-Fungible Tokens, or NFTs. But here we are.  Anyway, a recent complaint filed in the Eastern District of Louisiana challenges the SEC’s efforts to classify NFTs as securities. The plaintiffs allege that two SEC enforcement actions targeting NFTs on the basis that they are securities under the Howey test put the agency in the business of “determining when art needs to be registered with the federal government before it can be sold.”

The plaintiffs contend that the SEC is all wet when it tries to apply Howey to NFTs. This paragraph of the complaint provides the gist of their argument:

The relationship between a creator of digital artwork and a NFT holder is not meaningfully different from the relationship between any other type of artist and art owner. By acquiring artwork in the form of NFTs, the purchaser does not automatically (or typically) enter any ongoing contractual relationship with the seller or creator of the asset.

While the seller or creator—like Plaintiffs here—may publicly discuss their intentions to continue creating and marketing their art and may use the profits from the NFT sales to financially support themselves and their artistic endeavors, that does not mean that the seller or creator has any ongoing commitment or obligation to undertake any specific action or to manage any common venture for the purchaser’s benefit. Instead, the purchaser possesses and holds the asset outright, albeit perhaps with a subjective hope or belief that the asset will increase in value. Thus, no investment contract exists under the test established by Howey.

That’s an interesting argument, but since we’re dealing with NFTs, you’d expect to see a touch of goofiness to this lawsuit – and it doesn’t disappoint. Let’s meet our plaintiffs:

– The first is songwriter Jonathan Mann, aka “Song a Day Man.”  According to the complaint, he’s in the Guiness Book of World Records for writing a song a day every day since January 1, 2009.  He’s even written a song commemorating the filing of this lawsuit. Fittingly, it’s called “I’m Suing the SEC.”

– The second is Brian Frye, a professor at UK Law School.  Prof. Frye is a true NFT afficionado, and one of his claims to fame is selling a piece of conceptual art called “SEC No-Action Letter Request” as an NFT. In what may be the most meta move of all time, Frye’s letter asked the SEC to opine on whether his plan to sell NFTs of the no-action request to the public constitutes an offering of a security that must be registered under the Securities Act.

We’ll keep an eye on this one.  It has the potential to be more entertaining than the usual cases challenging the SEC.

– John Jenkins