Sec No-action Letter Request

• Publication year: 2022

54 Creighton L. Rev. 537. SEC NO-ACTION LETTER REQUEST

SEC NO-ACTION LETTER REQUEST

BRIAN L. FRYE ^[D1]

Art is all a matter of personality. ^[1]

I. INTRODUCTION

Art securities are nothing new under the sun. For more than 100 years, private investors and investment companies have created "art investment funds" in order to securitize works of art, often with the intention of selling shares to the public. ^[2] But I believe this article may be the first work of "securities art." Specifically, this article proposes to create a work of conceptual art that is a security as defined by the Securities Act of 1933 and to sell investments in that security to the public.

This law review article constitutes an offering memorandum for a work of conceptual art titled "SEC No-Action Letter Request." The work consists of the concept of sending a no-action letter request to the United States Securities and Exchange Commission, proposing to sell certificates of ownership of a work of conceptual art titled "SEC No-Action Letter Request" to the general public in an edition of fifty for $10,000 each and asking the SEC to opine on whether the proposed offering as described constitutes a security that must be registered under the 1933 Act.

I believe that the offering described in my SEC no-action letter request constitutes the sale of a security as defined by the securities laws. Accordingly, the SEC should deny my no-action letter request, as I am proposing to sell an unregistered security that is not an exempt offering. I observe that the nature of the work of conceptual art I am proposing to sell is formally indistinguishable from many other works of conceptual art sold by other artists, and the terms on which I am proposing to sell the work are similar to the terms on which artists typically sell conceptual art. As a consequence, many works of conceptual artworks are probably defined as unregistered securities under the 1933 Act, and the art market is replete with unwitting violations of the securities laws.

II. REGISTRATION UNDER THE SECURITIES ACT OF 1933

Under the Securities Act of 1933, it is unlawful to use any instrumentality of interstate commerce to offer for sale any unregistered security, unless the security is exempt from registration. ^[3] Section 2(1) of the 1933 Act defines the term "security" for the purpose of the Act as:

[A]ny note, stock, treasury stock, security future, securitybased swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. ^[4]

In SEC v. W.J. Howey Co., ^[5] the Supreme Court interpreted the definition of "security" under the 1933 Act. Howey owned large citrus groves in Florida. It sold real estate contracts on the groves for a fixed price per acre and encouraged the purchasers to lease the land back to itself via a service contract in exchange for a share of the profits. ^[6] The Supreme Court held that Howey's contracts were "securities," because "an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." ^[7]

The Supreme Court determined that Howey was selling a security because its customers weren't really buying an orange orchard; they were buying a share in Howey's profits. ^[8] According to the Supreme Court, under the 1933 Act, "[f]orm [is] disregarded for substance and emphasis [is] placed upon economic reality." ^[9] In other words, the definition of "security" for the purpose of federal securities regulation is intentionally broad. "Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called." ^[10] An investment is a "security" if it includes four elements:

1. The investment of money

2. In a common enterprise

3. With the expectation of profits

4. From the efforts of others. ^[11]

All of the elements of the Howey test are construed broadly and inclusively. Element 1, "the investment of money," includes any kind of investment and does not require any monetary consideration. ^[12] Element 2, "in a common enterprise," includes any kind of commonality among the investors or between the promoter and the investors, in which the investors depend on the decisions of the promoter. ^[13] Element 3, "with the expectation of profits," includes any method of realizing appreciation on the asset, including selling at a gain in a secondary market. ^[14] And element 4, "from the effort of others," includes any circumstance in which the promoter creates or supports the market for the asset. ^[15]

Of course, there are many different exemptions to registration under the 1933 Act, which are described in Regulation D, among other places. ^[16] The exemptions are intended primarily to provide limited access to capital markets to small companies that cannot afford the expense of formal SEC registration. But they are narrow and demanding. Among other things, exempt offerings under Regulation D are restricted to "accredited investors," and trading in the exempt securities is strictly limited. ^[17] Moreover, the issuer of an exempt security bears the burden of proving the exemption. Offering to sell an unregistered security to the general public without proving the transaction is exempt is a violation of the securities laws.

III. THE ART MARKET & CONCEPTUAL ART

The art market is the commercial market for works of fine art, in which sellers and buyers agree to engage in financial transactions in relation to those works. Essentially, the definition of a "work of fine art" is "whatever you can sell in the art market." Historically, the art market focused on the sale of unique physical objects, including paintings, prints, and sculptures, among other things. But more recently, participants in the art market have engaged in financial transactions in relation to other kinds of works. For example, people routinely sell copies of works originally created in a medium that permits unlimited mechanical reproduction, including prints, photographs, motion pictures, videos, and digital images. ^[18] Typically, these copies are sold in the form of artificially limited "editions." In other words, the artist promises to create only a limited number of copies of the work, and buyers purchase one of those copies, relying on the artist's promise to limit the supply

The market for conceptual art also relies on limited editions and the artist's promise to limit the supply of the work. But there are complications. "Conceptual art" or "conceptualism" is artwork that consists of an idea rather than a physical object. As conceptual artist Sol LeWitt famously observed:

In conceptual art the idea or concept is the most important aspect of the work. When an artist uses a conceptual form of art, it means that all of the planning and decisions are made beforehand and the execution is a perfunctory affair. The idea becomes a machine that makes the art. ^[19]

For conceptual artists, the realization of a work of art is immaterial and irrelevant. The work of art exists as soon as the artist conceives it, and the tangible copy of the work is only a record of its execution, not the work itself. For example, according to LeWitt, his wall drawings consisted of the instructions for their creation and the certificate that memorialized their sale, not in any particular execution. Indeed, LeWitt insisted that the actual wall drawings weren't themselves works of authorship at all but were instead only the tangible residue of the actual, underlying conceptual work. If the owner of a Sol LeWitt wall drawing wants to display it in a new location, they must destroy the existing execution of the work and create a new execution in the new location. This obligation created a convenient source of revenue for LeWitt and his employees, who spent a considerable amount of time erasing and executing drawings over and over again.

Typically, the owners of the work were indifferent to the expense. While it was expensive, if the work is worth a fortune, who cares? But occasionally, the metaphysics got awkward. Most amusingly, a Houston homeowner recently discovered that the prior owner of her house had executed his LeWitt wall drawing next to the stairs and "erased" it by covering it with plaster when he sold the house. But the new homeowner realized that she could chip off the plaster and expose the drawing.

The art world was perplexed...