DON’T GET NFTEASED
It’s 2022, and everyone from Snoop Dogg to the cashier at your local supermarket is creating or sponsoring their own NFT project, including many of our Firm’s clients. NFTs (non-fungible tokens) might be a revolutionary way for artists and collectors to control their work, but they are currently a Wild West. Before you get rich quick on this “21st Century Gold Rush”, consider some of the lessons we have learned through our practice.
YOUR NFT IS SUBJECT TO COPYRIGHT – U.S. copyright laws protects any “creative” works that is “fixed” in a tangible form by its “author”. It also allows the author to control the creation of new works that are “derivative” of their original work, whether because such new work shows the original work in a different medium, or because it uses the essence of the original work as the base for its new additions. Thus, for example, I could not make and sell a Spongebob Squarepants Halloween costume that was based off the TV cartoon (same idea different medium) without likely infringing on the copyright for Spongebob Squarepants. I could not take the Spongebob Squarepants cartoon and then commercialize my own Anemonephil Triangleshirt cartoon. AND I cannot take someone else’s artwork and make it into an NFT without their permission without committing copyright infringement. Each individual copyright infringed upon (and we find that NFT projects often contain hundreds of potentially derivative works) could in theory subject the infringer to $30,000-$150,000 in “statutory damages” under US copyright law.
OUR ADVICE: Before you issue your project, make sure you own your art. If you have purchased it from someone else, make sure that they owned the art they are selling you, make sure they officially sell you the rights to use the art, and make sure that the seller is not going to disappear anonymously into the night right after making the sale.
MIND YOUR OFFERINGS – Chances are that if you are starting an NFT project, you are intrigued by the promise of profit margins that dwarf those of traditional investments. Alas, the reason that NFT projects can promise pots of gold at the end of rainbow, while stocks cannot, is that many NFT projects are unregulated securities. A “security” is basically any tradeable financial instrument that holds or represents any kind of value, like a stock, or a purchase option, and where that value can change depending on trading or market activity. Many NFT projects, which truthfully might fall a bit short of the Mona Lisa in their merits as art, focus their promotional materials and marketing much more on the financial side benefits of ownership and trading (such as percentages of future sales, first access to new NFT projects, issuance of rarer NFTs, and so forth). These financial incentives increase the value of the project, which in turn makes the projects’ owners or creators a profit when the project is sold. This process is similar to how stock markets work—stocks are bought and sold to create value for those in their market, and the stocks increase in value by offering benefits to owners (such as service perks, or yearly distributions) and through heavy trading volume. The difference is that publicly traded stocks must follow many rules meant to safeguard the average consumer, and NFTs do not. The US Securities and Exchange Commission has recently stated that it will begin evaluating whether certain NFTs are actually subject to (and generally not following) securities laws. Given that the SEC has been staffing up with specialists in this field, we can predict a wave of SEC investigations and new rules in the NFT space.
OUR ADVICE: Before you issue your project, speak with a securities specialist to ensure that your project structure is either (i) not a security, or (ii) complies with securities laws.
YOU ARE LESS ANONYMOUS THAN YOU THINK – We have seen numerous clients shrug off these concerns on the grounds that the client is anonymous and thus basically immune to investigation. Unless you have married your NFT project with spy-level operational security, this is simply not true. Certain exchanges or wallets hold some of your information to comply with international banking rules. Email addresses are not necessarily anonymous, IP addresses are often traceable, and anonymous transaction histories can be linked to real-life purchases. Your Discord conversations can unwittingly reveal personal details, your smart contracts likely contain traceable information, and each of your business partners is a potential canary.
OUR ADVICE: If you believe your project might raise legal issues, don’t assume you can hide from them.
MILGROM AND DASKAM IS A FULL-SERVICE CORPORATE LAW FIRM THAT SPECIALIZES IN ISSUES RELATING TO EMERGING TECHNOLOGIES. PLEASE CONTACT ME OR THE FIRM WITH ANY QUESTIONS YOU MIGHT HAVE ABOUT YOUR NFT PROJECT (AND PLEASE, DO IT BEFORE YOU START 😊)
ABOUT THE AUTHOR
Jared is a New York corporate attorney specializing in regulatory compliance. While active in several fields, Jared focuses his practice on employee benefits, trademark prosecution, and business acquisitions, particularly in the fields of e-commerce and health and beauty. He also provides pro bono counsel to charities devoted to animal welfare and responsible land use and has published writings on matters ranging from anti-counterfeiting operations to the trademark doctrine of foreign equivalents.
Jared graduated cum laude from Hamilton College in 2008, and cum laude from The George Washington University Law School in 2014, where he was the recipient of the 2013 Finnegan Prize. Jared is also an inventor who owns or is in the process of securing several US patents on certain medical and storage technologies.
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