Introduction
NFTs, or non-fungible tokens, are digital assets that are sharply rising in popularity. Every day, individuals are launching new NFT projects with similar or new features compared to prior NFT projects. NFTs are attractive to individuals and businesses because they offer the ability to own something unique and genuine. It is unique because no other NFT is the same as another—they are not interchangeable. It is genuine because ownership of the NFT is tracked and stored on the blockchain, meaning that one´s proof of ownership is authentic and viewable to everyone.
That said, because NFT projects implicate various federal laws, it is important to find an established law firm and choose an attorney experienced in this field. This article, written by the NFT attorneys at Oberheiden, P.C., describes five points of consideration before retaining an NFT attorney.
NFT Lawyer? — 5 Points to Consider First
While extremely popular, NFTs are still novel forms of assets and projects. Many individuals and businesses do not fully understand them, their legal consequences for noncompliance, and how to follow the law. As more and more individuals seek out the services of an NFT attorney, it is critical to do your due diligence to determine whether your NFT attorney is experienced, knowledgeable, and dedicated to your NFT project. Below are five points of consideration to evaluate before deciding to retain an NFT attorney:
1. The NFT project and NFTs within the platform could satisfy the SEC´s definition of “security” and therefore be required to register or be exempted.
The Supreme Court in Howey outlined a four-pronged test to determine whether something is a “security” for registration purposes: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profits, and (4) derived solely from the efforts of others. SEC v. W.J. Howey Co., 328 U.S. 293 (1946). To help with this analysis, the SEC also released a framework for digital assets to determine whether a novel digital asset project is actually an “investment contract” under Howey and therefore must be registered as a “security,” or exempted. NFTs could satisfy this test regardless of the developer´s efforts to market the NFT project as a utility platform with consumptive purposes. Further, if the project has characteristics that resemble a passive investment, the SEC would be more likely to scrutinize the project, company, and NFTs involved for potential violations of the securities laws.
2. Be aware that your NFT project could have additional legal consequences once the NFTs are considered “securities.”
If your NFT project meets the SEC´s definition of “security,” it is important to understand that this could entail additional requirements under the federal securities laws. In addition to registering your NFTs with the Commission or applying under an applicable exemption, your NFTs may now be regulated with respect to marketing efforts and transfers. If your company includes individuals who deal with the NFTs and communicate with users, those individuals may have to register as broker-dealers. If individuals are giving out financial advice or projections, they may have to register as investment advisers under the Investment Advisers Act. If your whitepaper or NFT project is noncompliant or contains misrepresentations or false statements, you could be found liable under the antifraud provisions of the securities laws. Lastly, in certain circumstances, if your project involves accepting and transmitting cryptos on behalf of others, FinCEN may regulate you as a money transmitter under the Bank Secrecy Act, which would require a license. Ask your NFT attorney about these consequences for your case and circumstances.
3. Certain NFT platforms can be deemed as financial institutions and therefore obligate the owners and managers to register the platform as a money transmitter and get a license.
Certain NFT platforms can be carrying on duties similar to those of a financial institution. These activities are called money transmitting services and typically involve holding and transmitting cryptos on behalf of or at the behest of third parties. The Anti-Money Laundering (AML) Act of 2020 expanded upon the definition of a financial institution under the Bank Secrecy Act to include dealers in art and companies that transmit cryptocurrencies. As can be imagined, NFT platforms that offer NFTs for sale, sell legally enforceable rights, or facilitate the trading of NFTs from multiple parties may be classified as financial institutions. In such cases, the platform will have to follow various FinCEN rules. Failure to do so is a violation of the Bank Secrecy Act and could lead to criminal fines and penalties as well as imprisonment. Lastly, be sure to ask your attorney how being classified as a financial institution implicates your tax obligations.
4. Ask your NFT attorney how to best deal with and protect your intellectual property rights.
Intellectual property law is very important when individuals and companies are launching NFT projects. NFT projects often entail the creation of a new design, content, and product—each of which is different and unique compared to the other. Every time a new NFT is minted, the creator must consider copyright and trademark law. Sometimes, royalties and publicity rights may also need to be considered in cases where the NFT is bought and sold among multiple parties. Within the contracts for such agreements, it should be clear which rights—if at all—are being licensed and whether the license or rights assigned involve an exclusive or non-exclusive right to use the IP. If this applies to you, make sure your NFT attorney is experienced in IP law and can effectively explain it to you.
5. Consider the specific crypto and blockchain issues surrounding NFT projects and how they may implicate federal law. Always ask your attorney to explain this to you.
NFT projects are launched on blockchain technology and often involve a platform that utilizes coins or tokens for the purchase and trading of NFTs. Every stage of the NFT project must be considered for legal implications starting as early as the development and distribution process. One of the first issues to be addressed, as discussed, is NFT registration and subsequent SEC compliance such as filings, disclosure, and reporting obligations. If the NFT project involves a platform or phone apps, legal obligations under the securities laws´ antifraud provisions or the FTC´s prohibition on deceptive advertising must be addressed. Additional miscellaneous areas such as NFT drops should also be evaluated. Be sure to ask your attorney to explain the federal laws and regulations that will apply to your NFT project at every stage.
“Many NFT projects can run afoul of the federal securities laws. For instance, mass-producing NFTs or fractionalizing one large NFT could lead federal agencies such as the SEC to conclude that such an NFT project is actually an “investment contract” or “security” in disguise. It is important that your NFT attorney understand not only what an NFT is and how to launch an NFT project but also how to be compliant with federal law to avoid any legal consequences.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
Conclusion
NFTs are growing in popularity and accepted by both individuals and businesses alike. However, NFTs are still a novel form of business and technological innovation. Because of this, their regulation is uncertain and inconsistent. But this has not stopped federal agencies from taking action against individuals and companies for failing to comply with federal law. Dealing with the possible legal consequences and federal provisions that could be at stake are challenging tasks. Therefore, it is important to research NFT attorneys from reputable law firms, ask questions about your potential NFT project, and take the necessary steps to achieve full compliance. Find a lawyer proficient and knowledgeable in business law and experienced in handling cases concerning NFTs.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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