Fenwick intellectual property partner Andrew Klungness spoke with Billboard about the legal pitfalls musicians might face when selling non-fungible tokens (NFTs) and how to avoid them.
NFTs have become a popular way for musicians to commercialize recorded music and live experiences. These unique digital assets come with a blockchain-based version of a “certificate of authenticity.”
Among many other issues discussed, the article notes that because NFTs share certain qualities with financial instruments like stocks and bonds, some types of NFT sales could incur scrutiny under federal securities law, including by regulators at the Securities and Exchange Commission (SEC).
It’s unlikely that a simple NFT, like a digital concert poster, would trigger that kind of oversight, but Klungness noted that it’s good to take extra steps to ensure that they don’t. Klungness pointed out that the deals that may face more scrutiny involve NFTs that are marketed as likely to increase in value because of the investments of others.
"Simply selling a copyright interest is probably not a securities issue," Klungness said, "but when you get into fractionalizing things, where money is being invested by people who are relying on your efforts to generate future profits, there's potentially very hot water there."
He noted that artists should instead market their NFTs as a way to connect with fans, not as a tool for future financial gain. He also suggested partnering with a sophisticated platform that has experience navigating these securities issues.
"If the word 'investment' even comes to mind," Klungness added, "I'd make sure you have a very capable lawyer."
The full article is available through the Billboard website.