Legal Do’s and Don’ts for an NFT Transaction

The world of Non-Fungible Tokens (NFTs) is still very much in a state of flux. Powered by the same blockchain technology that supports cryptocurrency, an NFT is a unique set of data stored on blockchain. Unlike dollar bills or grains of rice (which are interchangeable with one another), each NFT is different, as warranted by a digital certificate of authenticity which is traceable on blockchain and publicly available. NFTs are used to represent ownership of an original digital asset, such as a graphic art file, video clip, or music. Although an NFT does not prevent a digital asset from being copied, it does establish ownership of it, which is something that cannot be copied and therein lies the value of an NFT. It is important to note, however, that an NFT only gives the holder certain rights to the asset; the full ownership position still belongs to the artist.

If you are contemplating a business transaction involving NFTs, consider the following tactical suggestions before jumping in:

For Sellers

1. Be explicit when explaining the rights you are transferring to the buyer. The buyer is basically purchasing exclusive rights of access to an item, (like a license), that are similar to (but not equivalent to) full ownership of a piece of property.
2. Sell NFTs subject to a non-refundable policy with no (or very limited) exceptions.
3. Offer no assurances that the value of the NFT will increase.
4. Confirm the nature of the sale in writing, using what lawyers call ‘belts and suspenders’ language. Specifically, the sale is intended to fulfill the buyer’s aesthetic and collectible goals only; it should not be viewed as an investment. Include a reference to securities laws and attempt to disclaim any applicability thereof.
5. Remind the buyer that you have no obligation to conduct any activity to promote the value of the NFT.
6. Do not sell NFTs to an underage buyer, in order to avoid a future repudiation of the agreement.
7. Pass along any taxes and gas fees to the buyer, who may be savvy enough to push back on you. Gas fees? Yes, these fees are related to the minting of the NFT, the energy required by this process, and the consequent ecological impact. [But that is a topic for another day.]

For Brokers/Selling Platforms

1. Be explicit when explaining your role in the transaction; you are solely an intermediary facilitating communication between the parties; you are in no way representing either side.
2. Avoid endorsing the value of the NFT or the reasons for purchasing it, and make this position clear to both parties.
3. Require the buyer and seller to conduct their own due diligence regarding the parties to the transaction, as well as the value of the NFT being transacted.
4. Renounce any responsibility in the event the minting process fails.
5. To minimize risk of copyright infringement claims, consider the protections afforded by the Digital Millennium Copyright Act.

For Buyers

1. Unless specifically provided, you have no rights to make physical manifestations of the NFT. You cannot make lithograph prints, T-shirts or the like.
2. You can display and post the NFT in social media without affecting your license to the NFT.
3. You will likely be getting the NFT “AS-IS” with no representation as to the certainty that the NFT is clear of any infringement claims, such as copyright, etc.
4. You will likely be subject to a limitation of liability, which will attempt to direct any judge to grant you no more than a stated amount in the event you are able to successfully bring a legal action.

In sum, NFTs are like many other emerging technologies in that they are fraught with various imponderables. The headlines are certainly reporting huge sums of money in certain transactions. To my mind, NFTs are similar to an investment in art, which reminds me of something my mother, the watercolor artist, always said when people would ask if art is a good investment: “Diversify. Whatever money you have to invest, save some for art because you don’t store art in a file like a stock certificate. If you like the art, you will enjoy it every day, and that is your dividend.”

If you would like to discuss NFTs or a potential NFT transaction from any side of the table, please feel free to contact Brad Auerbach at bauerbach@outsidegc.com or 310-382-0019.

Brad Auerbach is a Partner with our California-based team, bringing over three decades of senior in-house counsel experience in the media, gaming and technology industries. Brad has been involved in structuring many groundbreaking deals with a diverse range of rights holders, including NFL, NBA, NHL, HBO, MTV, ESPN, Sesame Workshop, Nickelodeon, Live Nation, Marvel Entertainment, International Olympic Committee, English Premier League, Screen Actors Guild, every significant Hollywood studio, each of the major record labels, many major book and news publishers, several world class photographers and Getty Images, among numerous others.