Source: WIRED
By Jessica Klein
Compiled by: BitpushNews an
Since 2013, Jonathan Mann's only job has been to write and release a song online every day. From "Yeah, I'm Rocking a Headband" to "Joe Biden, Retire" (out July 1), his pop sound is both whimsical and current. While some of these songs would become viral hits, the Connecticut-based Mann, aka "Song of the Day Mann," says making money was "a chore." Sales through the Bandcamp platform and YouTube ad revenue "never made much." Session gigs and jingle contests filled the gap. ThenNFTs (non-fungible tokens) came along, allowing Mann to attach unique blockchain-based tokens to his songs, allowing buyers to easily purchase unique online versions. The technology revolutionized how he sells his music.
Jonathan Mann says that “NFTs are an easy way to capture the economic benefits of [viral] attention.” He can sell songs directly to buyers without involving third parties like record labels who take a cut. In addition, he can program NFTs to earn additional income through secondary sales. He claims that in 2018, his NFT “BUIDL” (the title is crypto industry slang) was the first tokenized song to be released on the Ethereum blockchain network and sold for 2.56 ETH (worth more than $5,600 at the time of writing). Since then, some of his hits have sold for five-figure dollar equivalents.
Then, things changed again. In August 2023, the U.S. Securities and Exchange Commission (SEC) announced a settlement of more than $6 million with Impact Theory, a media and entertainment company that sold NFTs containing digital images. About a month later, the SEC said it had reached a similar settlement with a project called Stoner Cats. The project involved celebrity couple Mila Kunis and Ashton Kutcher, who raised funds by selling NFT animated cats to produce an animated web series of the same name. (Both Kunis and Kutcher voiced the characters in the show, and Kunis's Orchard Farm Productions was involved in the production.) Stoner Cats agreed to pay a $1 million fine.
According to the U.S. Securities and Exchange Commission (SEC), the two projects conducted "unregistered offerings of crypto-asset securities in the form of so-called non-fungible tokens (NFTs)." In other words, the SEC, which has never provided clear rules for art or NFT sales before, is now quickly designating some NFT-related digital artworks as securities, which means they must be registered with the commission. Mann believes that these decisions could shake up the way the art industry, which has existed for centuries, operates.
On July 29, Mann and conceptual artist and attorney Brian Frye filed a lawsuit against the SEC in federal district court in Louisiana that began with a simple question: “Should art be regulated by the SEC?”
“We’re not libertarian or anti-government,” Mann said. “The SEC’s actions directly impact my ability to make a living, which in turn impacts many other NFT artists. To me, that’s the point: protecting our ability to experiment and make a living on the internet.”
Mann and Fry, represented by attorney Jason Gottlieb, are seeking a “declaration of judgment” from the SEC that they “have not violated U.S. securities laws” by releasing two specific NFT art projects, according to the lawsuit. Mann hopes to sell 10,420 NFTs for about $800 each, which are remixes of the song “This Song Is a Security,” which references the SEC’s 2023 action. Meanwhile, Fry’s “Cryptographic Tokens of Material Financial Benefit” project will include 10,320 NFTs minted on Ethereum, and he said the project’s economic structure is “intentionally identical to Stoner Cats.”
Frye added that the essence of the case is about NFT art in a broad sense, and “using NFTs to sell them, as most people do.” His goal is to make SEC regulators “think long and hard about the scope of their responsibilities.”
Securities vs. Art
The standard for determining what constitutes a security was established in the 1946 U.S. Supreme Court ruling in the Howey Company case, which sold citrus groves to buyers who shared profits with the company. The ruling established the “Howey Test,” which defines a security as “the investment of money in a common enterprise with the expectation of profit from the efforts of others.”
In other words, Gottlieb said, that makes the investment contract a security. This standard can be tricky when applied to art, whether traditional or NFT-related. “When you sell a certificate, you’re actually selling an interest in your art to an art collector,” Fry said. That means buyers invest with the expectation that “you’re going to become more famous.” And that fame, in turn, makes the art more valuable.
Gottlieb says that if you look at it this way, and with reference to the Hoey test, art buyers are acting a lot like they are investing in a common enterprise and expecting to benefit from the artist’s efforts. The difference, Gottlieb points out, is that “the artist doesn’t owe you anything.” You might hope that a signed Brat album you purchased will appreciate in value as Charli XCX continues to sell out venues, but that’s not what was promised at the time of the record’s sale. The same, the lawsuit argues, is true of a digital cat cartoon tied to a blockchain code.
In addition, people don’t buy art NFTs just to resell them for a profit. Gottlieb said they buy Mann’s work “for all sorts of reasons,” such as simply liking the music itself. But based on the SEC’s rulings on Impact Theory and Stoner Cat, Frye believes that “not only the entire NFT market, but even the entire art market itself has become a security.”
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 position on how artists using the technology should sell their works. Michael Rinaldi, an attorney and partner at Duane Morris in Philadelphia, said Mann’s work “may be sufficiently different from the two projects that paid the fine.” If an NFT holder holds it because it is “collectible or unique...or for enjoyment rather than as an investment,” it would not constitute a security.
Mann and Fry’s lawsuit aims to get some answers from the SEC. “Besides the digital nature of [Impact Theory and Stoner Cats], there is little conceptual difference between these artwork series and Andy Warhol’s 1962 series of 32 Campbell’s Soup Cans,” the lawsuit states. The Stoner Cats NFTs helped finance an animated series, but if the art isn’t purchased to fund an artist’s future work, then what is it?
However, the nature of NFTs is different from other art mediums and has a stronger monetary connection. Ben Gentilli in London uses the name "Robert Alice" when creating blockchain-related art. He said: "Canvas is not a financial layer." NFTs are like "if art was made with money." When NFT art sales exploded in 2021, represented by the $69 million sale of a work by digital artist Beeple at Christie's, the market highlighted the investment potential of this medium. "You can see this gradually seeping into the language of people promoting NFT projects," Gentilli said.
Gottlieb said the stakes of the lawsuit could be high enough to involve the First Amendment. Because the SEC ordered Impact Theory and Stoner Cats to destroy unsold NFTs from their projects, the regulator could be seen as asking artists to burn their art. "It's an extremely dangerous and oppressive thing for the U.S. government to tell artists to do this simply because they work in this new digital medium," Gottlieb said.
What happens next?
While several NFT artists who spoke to WIRED mentioned the “chilling effect” that past SEC actions have had on the NFT art market, others aren’t worried about drawing the SEC’s attention. “Personally, the SEC’s actions to date have not had a significant impact on my digital art practice,” said NFT artist Bryan Brinkman.
Additionally, with the 2024 election approaching, regulatory changes are likely. Former President Donald Trump has promised to fire SEC Chairman Gary Gensler, who has taken a tough stance on the cryptocurrency industry, if elected. The two commissioners who dissented in the Impact Theory and Stoner Cats settlements, Hester Peirce and Mark Uyeda, are both Republicans. Vice President Kamala Harris has not yet publicly spoken out on the issues.
At the very least, artists hope the lawsuit will get the SEC’s attention. “I’m hopeful that the end result will be clearer and more transparent rules for publishing digital collectibles and artworks,” Brinkman said. Digital artist Gentilli isn’t optimistic, though. He called the lawsuit an interesting “artistic gesture” but noted that the SEC hasn’t even provided clear rules for cryptocurrencies, let alone NFTs, which “are much lower on the priority list.”
The SEC has 60 days from the date the lawsuit was filed to respond. Gottlieb said the agency can choose to file a motion to dismiss or, in its response, "deny the allegations and plan to defend."
Whatever comes next, it won’t be straightforward. “The possibilities for software are as limitless as the human imagination,” Gottlieb said. Blockchain-based tokens can be “the objects of investment contracts,” he added, but they can also be commodities, payments, concert tickets, or works of art, or all of these at once — “like Schrödinger’s software.”
For Mann, the whole experience was like the internet meme of the domino effect, in which a person is about to hit a tiny white rectangle, which sets off a chain reaction that eventually leads to a domino as big as a tombstone. The first domino was Mann learning about NFTs at a 2017 conference; the last was him suing the SEC.
“Before 2021, I didn’t know what a security was,” Mann says. On “This Song Is a Security,” Mann pleads with SEC Chairman Gensler, “Hey, Gary/Give me a call, baby/We can figure this out/Maybe all at once/Because this is so confusing/I don’t know what you’re doing.” Perhaps if things go his way, Mann will at least get some clarity.
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