Bankless - Suing The SEC | Jonathan Mann & Brian Frye

Episode Date: July 29, 2024

Jonathan Mann has been writing a song a day for 16 years and 211 days. Today, he and Brian Frye are suing the SEC. In today’s episode, Jonathan, better known as ‘Song a Day Man’ is joined by Brian Frye, a law professor at the University of Kentucky and NFT/security law expert.  Hear why Jonathan and Brian are suing the SEC, why this lawsuit is so important to the crypto industry as a whole, and what winning would mean for the future of our space.    ------ 📣 SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24  https://bankless.cc/spotify-premium  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2    ⁠ 🦄UNISWAP | BROWSER EXTENSION https://bankless.cc/uniswap  ⚡️ FUEL | EARN FUEL POINTS https://bankless.cc/fuel  🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle    ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum  🗣️TOKU | CRYPTO EMPLOYMENT  https://bankless.cc/toku  ------ ✨ Mint the episode on Zora ✨ https://zora.co/collect/zora:0x0c294913a7596b427add7dcbd6d7bbfc7338d53f/40  ------ TIMESTAMPS 0:00 Intro 4:58 Background on Suing  7:34 Jonathan Mann’s Backstory  9:58 Why Brian Got Involved  13:28 The 101 of the Lawsuit  17:22 What Does Winning Do?   22:14 Game Theory  25:14 Fear & Songs a Day 27:18 Logistics of the Suit    32:31 How to Support 34:41 Closing ------ RESOURCES Jonathan Mann https://x.com/songadaymann   https://x.com/songadaymann/status/1817959431206023653   Brian Frye https://x.com/brianlfrye  https://youtube.com/live/jo1ZuhuCVZE   ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures ⁠  

Bankless Nation, it's not every day that some of our own sue the SEC, but that is what's happening today. Jonathan Mann, otherwise known as Song a Day Man and previous podcast guests Brian Fry, are suing the SEC, preemptively in order to protect their livelihood and their passions. They want to make sure that their ability to produce art and sell them as cryptographic tokens on Ethereum is a legal thing to do without triggering the eye. of Gary Gensler and the securities law of 1933. Because as of now, as a result of the SEC lawsuit and settlement against Stoner Cats, the 2021 animated TV show, the precedent stands as art, sold as tokens, are unregistered securities, and therefore legal, making the SEC, the de facto regulator of digital art, so long as it has a digital token to go along with it. Is the SEC supposed to regulate art? Does it even want that for itself? How did we end up in a place where artists

and their art are colliding with the securities regulators? What timeline are we even on? Today on the show, Jonathan Mann and Brian Frye discussed their lawsuit that they are serving the SEC, the game theory behind it, and what its impact will be for our industry when they eventually bring home the dub. So let's go ahead and get right into the episode with Brian and Song and Dayman. But first, a message from these fantastic sponsors that make the show possible. If you want a crypto trading experience backed by world-class security and award-winning support teams, then head over to Cracken, one of the longest standing and most secure crypto platforms in the world. Cracken is on a journey to build a more accessible, inclusive, and fair financial system,

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Bankless Nation, I'm here with Jonathan Mann, otherwise known as Song. a day man and Brian Frye, previous podcast guest and lawyer. Actually, both of you have been on the podcast if you count all of the times that we have added Jonathan Mann songs to the end of our

weekly roll-up. But in other words, Jonathan, welcome to the bank of this podcast in live and present form. Thank you so much. I am very excited as you know, a big fan. And Brian, we had you on to talk about our NFTs securities, which was one of my more interesting

episodes and it was really not trying to actually ascribe a legal assertation as to whether they are or not, but more of a thought experiment as to the question of securities and the idea of NFTs. And you're kind of back for round two. So gentlemen, who wants to kind of drop the hammer on what we are actually doing here today, what you guys have already done here today in the legal process of the United States, but also here on the podcast episode today. Who wants to wants to take lead here. Let me give some background. Let me set the stage and then I'm going to,

and then we'll let Brian do his brilliant lawyer-lawyering to take us deeper. The SEC brought a case against Stoner Katz back in 2023. If folks will remember what Stoner Katz was, it was a big project that launched in 2021, sort of in the height of the frenzy of that time, it involved Ashton Cucher and Milakunis, although as I sort of like found out later on and as I dug into it,

it's really made actually by just some like working Hollywood animators, just like people who I actually really identify with as just like artists who are just trying to get by making their work and they just happen to like hook up with Milakunis and her whole thing and that she brought in the NFTs. And then they get slapped with this SEC lawsuit claiming that they were selling unregistered securities. The NFTs aspect of this cartoon animation were unregistered securities.

The cat JPEGs that they sold, according to the SEC, were investment contracts that they were doing with the people that bought them. If you read the complaint, if you read the sort of action that the SEC took against them, and what ended up happening was that they ended up settling for a million dollars, which is like what I learned later, like a million dollars is like a really good deal in this case actually. And it would have cost them many times that to fight. So they settled a bunch of things. But like they had to like one weird thing was that they had to destroy. They had some stoner cats left over that they were going to use for contests and stuff.

One of the pieces of the SEC thing was that like they had to destroy any. donor cats that they had in their possession. They'd like burn their artwork. Anyway, when this happened, I got really angry. Because as I read through the complaint, as I read through the action that they took, I realized that it sort of implicated everybody in the NFT space. It implicates me. It implicates Brian.

It implicates you, David, if you've ever sold an NFT at some, like, you guys have bankless NFTs. Like, we are all implicated because it's so broad. and there's no kind of like, it doesn't make sense. And yeah, so I got really angry by this case. I wrote a song. Jonathan, explain a little bit of your backstory. Jonathan, a song a day man.

Why are you so angry? How is this relevant to you? Yeah, well, since 2022, I've been basically making my living, selling my songs as NFTs. Every day I make a song. I put it on my website to go up for auction. You know, we're in this kind of fallow period for NFTs. but, you know, I have like a small and hearty band of people that want to buy the songs and they do.

And, you know, sometimes they go viral and they get more money. And that's how I've been making my living. So I took this sort of as a, you know, direct affront to my livelihood in a lot of ways. And just like, you know, everybody that I know who's making NFTs, there's so much creativity here. There's so much just brilliant artists doing their thing to feel. like we are all implicated in whatever machinations the SEC has going on made me so angry that I wrote a song called This Song is a Security, which I believe you guys actually played that week at the end of the bank was up at the end of the roll-up.

And as a result of that song, I started talking to some like lawyers in the space and talking about like what would it actually take to like take this fight to the SEC how would that work? And, you know, the balls were rolling. And they said, do you know anyone else who might be interested in suing the SEC in order to get some clarity on whether NFTs are actually securities or not? And I said, I know just the person, my friend Brian Fry, who I actually originally heard on. bank lists. That's the first time I ever heard of Brian who, you know, he can introduce himself. He's a brilliant lawyer, but also an artist. He has this kind of conceptual artist lawyer

crossroads that I imagine he may be a one of one intersection. A one of one intersection. So when when these lawyers are talking to you said, hey, we think it would be better if we have at least one other artist on this case. It sort of helps us cover more ground and we can, I said, let's talk to Brian. And Brian said, let's do it. And so, Brian, yeah, come on down and tell us your role in this whole story. Yeah, so I've been waiting for this lawsuit for 20 years, right? I started thinking about this problem when I was a baby lawyer at Sullivan and Cromwell,

working on securities law. And the more I looked at securities, the more I thought to myself, that looks an awful lot or sounds an awful lot like conceptual art. And everyone just kind of looked at me like I was crazy, and what are you talking about? And that doesn't make any sense. So, so forth. So in 2019, I actually wrote a, rather, I released a work of securities art titled SEC, No Action Letter Request, which I styled in the form of prospectus that I wrote as a Law Review article, in which I described how I was sending a no action letter request to the SEC,

proposing to sell a work of conceptual or titled SEC No Action Liter Request, consisting of sending a no action letter request to the SEC, right? And telling them, like, according to everything that you say, what I'm doing is issuing an unregistered security, so you really ought to tell me I'm not allowed to do this. And unsurprisingly, the SEC declined to respond to my no action letter request, although a young friend of mine did manage to eventually FOIA from them. almost entirely redacted set of emails that preserve nothing other than them calling my theories fanciful, right? Well, fast forward to 2021. And if T-Market explodes and I'm like, wait a minute, this is just proving everything I said in my article.

They said before, well, this isn't really a security because people wouldn't really buy it. And therefore, it's not a real market. And I'm like, hold my fucking beer, man, right? People are going to buy this. So I just took that article. I made it into an NFT project, dropped it on to OpenC, and it sold out in like 20 minutes for like, you know, $30,000 worth of ETH or something. And I was like, this is an amazing proof of concept that literally what I'm doing here is according to the SEC illegal. So when Jonathan came to me with this proposal, I was like, this is perfect.

Because I'm already on record, literally going to the SEC and saying, what the hell is wrong with you? You've got to explain what you're doing. This doesn't make any sense. Your theories are cockamamie nonsense, right? It can't be true that the SEC is authorized by statute to regulate the entire art market. That can't be true, right? And any theory of what is a security that says the SEC can regulate the art market is, bananas, right? Because the art market was around when the SEC was created, right? And 100 plus years

later, still ain't regulating the art market, right? No one expected it to, no one wanted to. It doesn't know how. It doesn't have the capacity to do it. There's no reason for it to do it. It doesn't make any sense, right? And I think that, you know, the SEC really needs to kind of take stock of what its real purposes, what its real institutional competencies are. and why it's regulating things in the first place. What is it trying to accomplish by doing this regulation? I just don't see that the SEC has anything to add to this market. And so I think what's happening here is as a result of the expansive interpretation of what a token is by the SEC,

the SEC has run up against some edge cases, which have started to push back against the SEC. I think we saw this when Richie Torres was challenging Gary Gensler on a congressional example. Yeah. Hey, Gary Gensler is this Pokemon card a security if it's a token on Ethereum? And Gary Gensler's like, well, it's facts and circumstances is what his answer was. And now you guys are presenting a very similar argument like, hey, Gary Gensler, is art a security? Hey, SEC, is art a security if it comes in the form of a digital token?

And that's like kind of the core message of your guys's lawsuit, right? Kind of like you walk us through the 101s of this lawsuit. Because just really just to remind listeners what's going on here is we are suing the SEC. Two people on the show today are suing the SEC trying to establish a precedent. What's the 101 of what's going on here? So we've created, we've each created our own new project that we are presenting to the court. We've created these new projects specifically to present. to the court as a

example of here's something that we're ready to release. We want to put this out. And we are asking the court to do something called a declaratory judgment or a summary judgment. Declaratory judgment. Saying either yes, this thing that you were presenting to us

is a security or no, in fact, this thing you're presenting to us is not a security. So mine is, you know, it's a programmatic remix of my this song is a security song. You know, I made a bunch of layers and I, I remixed it and it'll be remixed 10,420 times, which is the same amount of NFTs that the Stoner Cats put out, you know, the projects that we are putting out, while they're not exactly like Stoner Cats because nothing is ever the same,

there's no real difference between the material difference. There's no material difference between the projects that we're presenting and things like Stoner Cats or even Impact Theory, which was also another case that got settled. So we're presenting this to the court and we're saying, hey, court, give us some clarity here, like give us a ruling. And hopefully, Brian can talk to this, but hopefully what will happen

is that the SEC will, you know, come and have a good faith exchange with us of why they think that these things are securities and we'll get into, And Brian can get into that more specifically. Yeah. So I created a project that's a little more pointed in some ways than Jonathan. It's titled Cryptographic Tokens of Material Financial Benefit.

It's a work of conceptual art that consists of the concept of thinking about why art is valuable. And I'm selling this work in conceptual art in an addition of 10,320 NFTs for 0.01 each. And essentially what you get in exchange for buying one is the feeling of being a winner because you understand what it means for art to be valuable. And, you know, as with previous works, I'm going to explain to people exactly how this fits into the securities slash cryptographic art ecosystem. and I hope it's really clear to the SEC that if they're going to pursue the line of argumentation that they have been, then they have no choice but to tell me that I'm not allowed to sell

conceptual art. Okay, so we're taking this lawsuit to the SEC and there's going to be some back and forth, there's going to be some conversation, something's going to happen. What are we hoping? What's the win scenario look like? Well, so, I mean, if I may, right, this is a really this is a really particular kind of lawsuit. So what you're allowed to do under federal law, but we're filing in federal lawsuits, what you're allowed to do under federal law is if you have a reasonable belief based in fact

that the government or someone else, but here the government, is going to do something that will prejudice your interests in one way or another. It's going to harm you in some way. You can preemptively file a lawsuit against that other party, in this case the government or specifically the SECC, saying, hey, I want to do this. I think that if I do this, the government is going to sue me for it.

They're going to prosecute me for it. They're going to bring a civil action against me for it. Therefore, I want the court to preemptively say that what I'm doing is something that I'm allowed to do and that the government isn't allowed to bring a lawsuit against me for doing this thing. It's called declaratory judgment action because, The court declares that what you're doing is something that you're allowed to do. So that's what we're doing in my now hometown of New Orleans, Louisiana, in the Fifth Circuit, bringing in action against the SEC saying, hey, we want to release these projects. They haven't done it yet because we're worried that if we do it, the SEC is going to come after us.

And the SEC is going to prosecute us for it. And it's going to do like it did to Sotomats and make us give it a lot of money as like a final. we don't want to do that, right? We want to be able to do our conceptual art making and songwriting in peace. And specifically in my case, right, one of the reasons I think I was an attractive plaintiff here was that I've already gone to the SEC a couple of times since I want to do this, and they refused to respond to me, right? They refused to respond to my letters that I wrote to them,

described me exactly what I wanted to do, explaining why I thought it was a problem, in the form of an entire law review article laying out the entire kind of theoretical concern that I had, they just adore me. And then, and then, and then they go and sue stoner cats totally, totally in line with what you were saying to them in the first place. They ignore you and they sue stoner cats. It just, it boggles the mind how stupid that and how annoying that is. New projects are coming online to the mantle layer two every single.

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the SEC more or less. And the way that I'm seeing this unfold is that say that this goes to court, say the SEC wants to take this to court. And you have like defendant Gary Gensler versus versus versus. Jonathan Mann, the song a day man. And we have Jonathan Mann, the guy that writes a song a day every single day, and he's just simply asking for the court to protect his ability to write a song a day every single day. And if you go and you juxtapose some of the songs from Jonathan's song a day man,

which with Gary Gensler, the defendant, like Gary does not want to be in that position of being the guy that says that Jonathan Mann does not get to write a song a day and listen on Ethereum. That's just like, it's just a bad look for the agency. And so this is a part of like the game theory going on, right? You said it, not us. You said it. We didn't say. We have no comment on that specifically.

But I would say, you know, I would just say that I, you know, it's as we can joke about it. And it's funny and there's things. But I am genuinely angry. Like I'm like, like, every time I actually talk to like the stoner cats people and like, I get angry all over again. It just the unfairness really is driving me baddie. And so I would relish an opportunity, any opportunity. And this is the opportunity that I'm relishing to like just make it stop, you know,

hopefully. And so for me, the end goal is like NFTs are forever more, you know, we can just be artists and not have to worry about this bullshit. shit. So unlike Jonathan, I would say that I'm disappointed I'm disappointed. I'm disappointed in the SEC

and my Jewish mother would tell you that that's way worse. That's way worse than angry. And I'm disappointed in the SEC because I don't think they're doing their job. I don't think they're doing their job right. I don't think they're thinking about what their job

is. I don't think they're thinking about what they're saying and why they're saying it. I think they're being irresponsible with the incredible amount of power that they've been given as a government agency to regulate people's lives and people's ability to express themselves. And I think that's a really profound problem that they should be thinking about. And I'm disappointed that they don't have it in them to even recognize how they're affecting people's lives. And Jonathan, you say you're angry, but I would imagine if I was in your shoes and I'm, I am an artist who is creating and selling NFTs, and then I observe stoner cats getting sued for a million dollars.

I would also feel fear for my livelihood of my job. Oh, 100%. How many days in a row have you been singing songs? We're on 5,689 today. And that, like, if the SEC comes and sues you, you could still write a song. But your material income and your hobby of your life's career, of like writing a song a day for over 5,000 days

would be materially threatened. Yeah, it would be, you know, I mean, I came into NFTs in 2017, specifically with the hope that this would be a really great way to monetize song a day that I hadn't been able to do before. And so I finally get there and to, yeah, to face up against this like weird government agency overreach, which is not really like my bag normally, you know,

but here I am is just, really, it's really strange. It also is very like Songaday. Song of day is always leading me in these really weird places. And it's like, I, I just sent my friend Ethan Buckman from Cosmos chain a meme because he was the first person that got me interested in blockchain way back in 2017. So the meme is the, it's the, it's the domino meme. There's like a tiny domino and a big domino. It's meet, meet Ethan Buckman at a conference, tiny domino, sue the SEC, big domino. It's like just one thing leads to another and here I am. But yeah, no, absolutely.

I would be, if the SEC continues down that path of attacking, capriciously attacking NFT projects, not only does it like threaten me directly, but also, you know, everyone in the ecosystem is harmed and everyone who maybe wants to collect a song, they're implicated, everybody is implicated. I have purchased NFTs from an artist friend of mine, Nate Mueller. And as a result of that interaction I had with him, him and I have become friends. I have met his friends. I have learned from him and had just like amazing experiences, like learning from this artist and his network of people.

And that was because of just like the purchasing of a financial object on Ethereum that is associated with digital art with an MP4 file. I would be very disappointed had I not been able to have this experience that Ethereum and NFTs have created for me. And Brian, can you walk us through some of the logistics of this suit? You guys are filing the suit today. Congratulations. What are the next steps? How does this proceed from here? Well, for the time being, it's basically in the SEC's court.

And so the SEC is going to have to decide how to respond to the lawsuit. Essentially, there's two initial ways that a defendant and a lawsuit can respond to it. That's what the SEC and the various commissioners are here, is defendant. So they got two choices. They can either do what's called what's answered the complaint, right? In other words, file a responsive document or responsive pleading, answering all the claims that we have in the complaint, saying, you know, yes or no, that's true, that's not true. We agree to this.

We don't agree to this. We don't know about that. with respect to the various claims that we've made. Or they can take it a procedural approach and file a motion to dismiss under Rule 12B of the federal rules of civil procedure. In this case, they'd probably go for Rule 12B6, which would essentially be them saying, based on this complaint, you haven't actually stated a claim against us. We don't have to respond to this because everything you've said, you know, even if everything you said is true, it doesn't matter, we're still allowed to do what we're. want to do and there's no basis for you to bring this declaratory judgment action in the first place. Typically, what a defendant will do is file that second motion, that motion to dismiss

because it kind of is like kicking the can down the road, right? It's giving you an opportunity to kind of air your best position to the court and let the court kind of let you know what it's thinking about, you know, where you're at and whether or not the plaintiff has any possibility of success. I'm really interested to see what, if anything, they say in that 12b6 motion, if and when they file it. However, in this case, I actually think, and this is kind of unusual. I think there's a third option, right, where the SEC at least conceivably could just

say R bad, right? We didn't mean it, right? We don't actually want to do that. and everything you've said are things that we have no intention of regulating. Therefore, you can have your declaratory judgment action. We agree with you on the merits. They just fold. They just fold.

And I think they, I hate to be a predictor, right? But in this particular case, it wouldn't shock me if they fold it. Right? Because this will be a very awkward lawsuit for the SEC. It's not a good look. It's not a good look. No. And they've already had a bad experience with our lawyer.

So, you know, once bitten twice shy, as it were. And while we've, like, hoping for or being optimistic for optimistic outcomes with the SEC hasn't historically been the right horse to bet on. But the political climate is materially different in the last six months. So like kind of playing slate here. Like as a November election draws close. Like there's a different calculus being played out here. Yeah, that's definitely true. Brian, I wanted to ask you a question that I don't actually know the answer to.

Is there a timeline? Do they have a certain amount of time before they have to respond one way or the other? Technically, yes, but realistically no. Oh, interesting. Right. So there is a timeline. They have a certain number of days before they have to file their motion to dismiss. But they can ask the court for more time.

And in a case like this one, and especially with a defendant like the SEC, like the government agency, in general, courts are pretty receptive to defendants in general, but the government defendants in particular, asking for more time to respond. to a lawsuit of this kind. They'll get it. They can take as much. They can kind of drag their heels as long as they want on this one until the court kind of loses its patience with them. But I mean, I really think the harder question for them is going to be, do they really want to litigate this at all?

Right. Well, guys, I find this immensely entertaining as a piece of art. I'm enjoying it. So thank you for taking this to the court, taking this to the SEC. Is there anything we can do as listeners, as onlookers, as supporters, any way that we can support? Yeah, I mean, from my perspective, I have a couple things that I've set up. So as always, purchasing my songs helps me, helps my family. This is a great thing you can do.

You can bid on today's song, which is called I'm suing the SEC. And it's a, it's inspired by, uh, classic, um, TV intros. And it imagines Gary Gensler and me in a sort of TV show together that we're experiencing. Um, so please go, please go bit on that. I've also set up a PFP that people can mint for free on my website, uh, to use as their avatar if they want to like signal support. The good news is the lawsuit is taken care of. So we don't need help. We don't need financial help with the lawsuit itself. But, you know, this is my livelihood and any, any help people want to throw my way is always very much appreciated. Is it appropriate to ask who is funding the lawsuit? I think we were told not to say. So no comment on that. Secret benefit. Yeah. Yeah,

yeah, exactly. Yeah. And in my case, you know, you can follow me on Twitter. I always love that. And I would love interacting with new people. And I've written a lot of about this subject. I've tweeted recently just earlier this morning. A lot of the stuff I've written. So if you go to my SSRN page, you can download all that material and read it for free, learn more about my kind of journey in securities law and cryptographic tokens. And I'd be delighted to have people check that stuff out. And your podcast. That's right. Oh, yeah, I have a Pimp your podcast. I-S-Dixit podcast. I-P-S-E-D-I-X-T-E-E-I-T.

it focuses primarily on legal scholarship, probably defined as a whole bunch of crypto-related content on there as well. Yeah. And if bankless listeners, you guys are entertained and peaked by some of the conceptual legal crypto art being presented here, and you don't want this episode to end, I would actually go and suggest our other episode with Brian Fry. Highly suggested.

One of the more entertaining, fascinating, insightful podcast episodes that we've done in a very long time about how there's this secret fifth prong of the how we test, and that's kind of the one that really matters the most. It's the only one that matters. So we'll link all of these things just mentioned in the show notes. Jonathan, Brian, congratulations on suing the SEC. And thanks for coming on the episode today.

Thank you so much for having us. Thank you. Bye-bye. Okay. I'm really doing this. I'm suing the SEC. Okay. I'm really doing this.

I'm suing the SEC. Okay, I'm really doing this. I'm suing the SEC, the SEC.