NFTs and Fractional NFTs: Legal and Regulatory Concerns for Creators and Investors

Description

NFTs have emerged as a viable asset class in 2021. Like cryptocurrency, NFTs reside on the blockchain, but in contrast to cryptocurrency, they are unique and can represent a hard asset such as title to property or digital assets such as video images and tweets. As the market for NFTs and fractional NFTs evolves, counsel to NFT creators and the platforms should consider various legal and regulatory issues.

An NFT may be deemed a commodity, subject to general prohibitions on deceptive and manipulative trading under the Commodity Exchange Act. If offered on a leveraged basis, additional regulations could apply.

Investors may look to purchase fractional interests of an NFT, but such interests could be considered "investment contracts" subject to registration requirements of the Securities Act of 1933, and the sellers of fractional interests may be treated as broker-dealers under the Securities Exchange Act of 1934.

Activities related to the transfer, sale, and custody of NFTs may be subject to Bank Secrecy Act and FinCEN regulations. In addition, OFAC has pursued enforcement actions involving cryptocurrency transactions and blockchain technology--NFTs present a similar avenue of risk exposure.

Intellectual property laws, and in particular copyright and trademark laws, potentially limit the sale and transfer of NFTs and require consideration in any NFT transaction. Although some IP laws allow for the allocation of fractional ownership shares and fractional rights, contractual terms should specifically address any fractional shares.

Listen as our authoritative panel discusses the regulatory issues and legal risks associated with the marketing and sale of NFTs and fractional NFTs.