Art Is Not a Security

Brian Frye, a scholar specializing in law, holds a position at the University of Kentucky. Additionally, he’s an artist who dabbles in the field of non-fungible tokens (NFTs).

The SEC is wrong. No, it’s worse. The SEC is nuts. The NFT market is identical to the art market. Or rather, the NFT market is an art market. If the SEC can regulate the NFT market, then it can also regulate the art market. But the art market existed long before the SEC was created in 1934, and the SEC has never regulated the art market or even contemplated regulating the art market. It can’t and it shouldn’t. If Congress had wanted to give the SEC authority to regulate the art market, it would have said so. And, if it made sense for the SEC to regulate the art market, it would have done so a long time ago.

It’s not surprising to me that this Wells notice seems absurd, as I had anticipated something like this back in 2019 when I published a unique law review article titled “SEC No-Action Letter Request”. This piece, presented as a work of conceptual art, involved submitting a no-action letter request to the SEC for selling an artwork with the same title. I pointed out that it resembled an unregistered security according to the SEC’s criteria. However, the SEC chose to disregard my prediction, labeling my observation as “fanciful”.

Similarly, Matt Levine from Bloomberg and others concurred with them, stating that my artwork didn’t qualify as a security since it wasn’t something people would purchase. Well, I suppose. However, in my previous role as a securities lawyer at Sullivan & Cromwell, I can assure you that I wouldn’t have recommended such a strategy to a client, as they wouldn’t have been able to evade SEC oversight by offering a security that nobody intended to buy.

The emergence of the NFT market took me by surprise, as it led to people purchasing my artwork. I creatively transformed a “SEC No-Action Letter Request” into an NFT, which sold out in just under an hour. My joy wasn’t only about the earnings, but also validation of the idea. It seems my efforts were appreciated after all. However, the SEC remained indifferent and continued to disregard my no-action letter petitions.

It seems there was a misunderstanding at first, as I initially believed the Securities and Exchange Commission (SEC) held no interest in Non-Fungible Tokens (NFTs). However, it turned out that their intent wasn’t to sue me, but rather someone who had an incentive to negotiate a settlement. To achieve this, they targeted Impact Theory and Stoner Cats, both traditional NFT projects that had reached their end. Since the defendants had no motivation to contest, as they had already gained what they could from their projects, they chose not to resist.

As a dedicated researcher delving into the captivating world of Non-Fungible Tokens (NFTs), I have taken a stand against the Securities and Exchange Commission (SEC) by filing a lawsuit, not out of financial gain, but in defense of a deeper principle. The intriguing nature of NFTs has led me to question the consistency of the SEC’s regulatory jurisdiction, as they seem to struggle with understanding the unique characteristics that set these digital assets apart from traditional securities.

Essentially, Jonathan Mann and I initiated a lawsuit against the SEC in federal court, seeking clarification on their authority to control NFT sales. Since we’re merely artists offering our works for purchase to those who appreciate them, the method of sale via blockchain instead of a traditional catalog shouldn’t alter this fact.

In essence, when artists sell their artworks through traditional channels, they are essentially transferring ownership of a listing on their catalog. From an economic standpoint, these physical items – be they canvas or stone – serve as tokens for a share in the artist’s commercial reputation. NFTs operate in much the same way, but in digital format.

When the Securities and Exchange Commission (SEC) begins to oversee the Non-Fungible Token (NFT) market, it’s essentially taking control of the art market’s regulation. They can construct a technically valid argument that NFTs might be considered securities they have the authority to regulate. However, I am skeptical that the courts will find this argument convincing.

Regardless, if the SEC wants to go after OpenSea, it can’t avoid our lawsuit. And I don’t think it has any answers to our questions that aren’t embarrassing.

Keep in mind that the opinions presented within this article belong solely to the writer, and may not align with the perspectives of CoinDesk Inc., its proprietors, or its associates.