NFT Legal Considerations
Back in February Christie’s Auction House managed the largest NFT sale to date for an artist named Beeple. The art piece was a single piece called the First 5000, which was a collage of Beeple’s first 5000 digital artworks he created that never sold for any material value. The collage that was sold on an NFT went for $69 million. Check out the sale here. Another big sale was the “Disaster Girl” meme which was a photo that went viral on the internet. The father put the photo up for sale on the foundation for auction as an NFT and sold it for ~$600k. Check it out here. NY Times even sold some column I never heard about for $560K.
Why The NFT Hype?
The most exciting aspect about these NFTs is that a recurring royalty can be embedded in the smart contract so that for any sale after the first sale there is a royalty % that goes back to the “minter” of the NFT. The first sale is 100% but then the creator gets X% on the 2nd, 3rd, 4th, …. perpetual sales.
The NFT can be structured as a single unit or unique digital content or as X amount of copies (i.e. 10, 20, 100, 10,000 units).
Underlying Copyright Rights in NFTs
When selling NFTs, creators need to be cognizant to distinguish between ownership of:
- The NFT (the Token);
- The material object which the NFT refers to (the Content or Digital Copy); and
- The bundle of copyrights or other artistic rights that originates in the authorship of the work (the Intellectual Property).
In a standard NFT sale, the seller of the work does not transfer the underlying copyright to the purchaser along with the tokenized digital asset. However, the seller may also grant to the buyer the copyright itself, physical media containing the copyrighted work, or both. Of course, “minters” need to ensure they own all the underlying IP rights to the collection acquired prior to selling the NFTs.
NFTs Depicting Celebrities & Publicity Rights
Creators who own past collections depicting celebrities need to consider the content of the underlying NFT work, the context in which the NFT is sold and marketed, as well as the rights they acquired (the contracts acquired that provide a release to use a person’s name & likeness). Selling photos with a person’s likeness implicates publicity laws. When using another person’s likeness as part of an NFT, the creator/seller must consider their rights of publicity.
Rights of publicity may intersect with copyright law but must be considered and evaluated as a separate legal issue. Publicity rights are protected by state common or statutory law. The status of publicity rights varies significantly from state to state. The Right of Publicity is not limited to famous people (all people have a right to publicity). However, the rights of publicity are more commonly litigated in the context of well-known personalities. Notably, a person may violate an individual’s Right of Publicity, even if they are using a work that is properly licensed or does not violate copyright law.
Creating Commercial Transactions with NFTs
The Golden State Warriors site above is a great example of how these commercial transactions are currently structured. The rights and duties of the seller and buyer of an NFT will be based on a combination of:
- The specific terms of the agreement between the parties;
- The Terms & Conditions of the marketplace or platform where the exchange is made ( if any); and
- The state or national laws that govern the transaction in the event of a dispute.
Buyers and sellers of an NFT cannot rely on platforms or marketplaces to execute or enforce ‘smart contracts’ or unique agreements between the parties. The parties may need to enter into a separate written agreement, especially when customizing NFT arrangements that will not rely on the existing platform interfaces.
If you are wanting to sell physical pieces in conjunction with an NFT sale, many groups may want to model the Golden State Warriors legacy NFT collection which uses supplementary terms & conditions. Check it out here. (However, I’m not entirely sold that a supplementary T&C would be binding on subsequent sellers and buyers. Although, some scenarios can work depending on your situation).
Blockchain market choices for NFTs
There are a number of different marketplaces that could be used to sell NFTs. Opensea, Foundation, Nifty Gateway, SuperRare, Mintable, Rarible, etc. Not all of them use the Ethereum blockchain. Dapper labs use their own blockchain called Flow. There is also Binance smart chain, Tezos blockchain, Cardano, and others that are creating their own NFT tokens.
There are some underlying issues and strategies to consider with each, as well as tax implications. Some of these tokens require additional steps or conversions that create taxable events due to no direct trades with the US dollar or the access to exchanges is very limited. FLOW, used by Dapper Labs, is only on two exchanges that offer a FLOW/USD option, whereas Ethereum is highly accessible, is the current market standard, and would incur only 1 taxable event.
Crypto Community & Marketing NFTs
Crypto is very much a community-based type cult following. So just putting up an NFT with a photo and expecting it sells for thousands is not likely for the first few immediate NFTs. Promoting through social media, Clubhouse, Reddit, and Press Releases before the NFT “drops” (goes on sale for auction) is a necessary strategy just like promoting other products.
There is a strategy in Minting single NFT pieces and/or “collections” within a single NFT. You can check out all major NFT collections here. Dapper Labs has created various collections like CryptoKitties and the NBA Top Shop (which has individual basketball cards & “packs” of cards). Musicians are selling NFT albums on Nifty Gateway, IBM is putting their patents on NFTs for quicker access to market monetization, and other creatives have their own collections on Opensea, Foundation, & Rarible. There are lots of creative “fan experiences” being utilized with NFTs, and those add-ons licensed within the NFT are driving a lot of this space.
NFTs are providing creators, inventors, and entrepreneurs new avenues to monetize on their intellectual property.