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Deep Dive

4 Risks Musicians Need To Consider Before Selling An NFT

Like any new tech market, selling music-related NFTs comes with plenty of unknowns. And with the unknown comes legal pitfalls. Here's how to avoid them.

For artists whose touring revenue dried up during the pandemic and who have long complained about paltry streaming royalties, non-fungible tokens offer an enticing new form of income — and the biggest names in music have taken notice. In February 2021, Grimes auctioned a set of art NFTs for a reported $6 million. That March, Kings of Leon released their album When You See Yourself as an NFT, generating over $2 million in a week. Around the same time, EDM star 3LAU earned a reported $11.7 million by auctioning off 33 NFTs. Even Keith Richards is now selling an NFT linked to one of his famous guitars.

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NFTs are a form of cryptocurrency in which each token represents a unique digital asset — essentially a blockchain-based version of the “certificate of authenticity” you’d get when buying an original painting or a rare baseball card. Though they’ve mostly been tied to visual art since they arrived on the scene in 2018, NFTs can contain recorded music, access to a live experience or even the right to collect a small stream of royalties.

But like any new market or technology, selling NFTs comes with plenty of unknowns. And with the unknown comes legal risk.

“Musicians are obviously interested in generating new streams of income and NFTs are a great way to do that,” says Adrian Perry, co-chair of the music group at law firm Covington & Burling and an expert in the emerging music NFT space. “But if you’re a musician, this is probably not something you’re used to dealing with, and you could be walking into some legal risk if you’re not careful.”

Case in point: In June, rapper Jay-Z sued to block his Roc-A-Fella Records co-founder Damon Dash from auctioning off an NFT covering a portion of the rights to Reasonable Doubt, Jay-Z’s 1996 debut album. Jay-Z argued that the album was owned by Roc-A-Fella, not the individual partners themselves, and that Dash’s one-third ownership in the label didn’t give him a right to sell off its “most prized asset” — as an NFT or otherwise.

“The sale of this irreplaceable asset must be stopped before it is too late, and Dash must be held accountable for his theft,” the lawsuit says. “The bottom line is simple: Dash can’t sell what he doesn’t own.”

Dash has argued that he wasn’t trying to sell the album and instead wanted to sell his stake in Roc-A-Fella, but a federal judge quickly issued a restraining order blocking the auction and the case has now ended up in protracted litigation.

Though it’s an extreme example, the battle between Jay-Z and Dash is a high-profile reminder that musicians need to err on the side of caution — and almost certainly consult with a lawyer — before they go minting NFTs.

“That case is sort of the classic example of what can go wrong,” says Kevin Lam, an attorney at the tech-savvy law firm Goodwin Proctor, who expects NFT-centered lawsuits to increase in frequency in the years ahead. “You have to go back and do your due diligence before you do this.”

Here are four things to watch out for:

Contractual Clarity

Above all else, any NFT sale needs to be precise — in writing — about exactly what is being sold.

For an NFT covering media content like digital album art or collectible merchandise, that means leaving no questions about the purchaser’s rights to the intellectual property (IP) in question: Can users share it on social media? Can they reproduce it? Do they own any rights to the content they bought? The answers to those questions need to be stated clearly in a contract ahead of the sale.

“Organizations minting NFTs that are associated with some specific art or media, like a song or an album’s cover media, need to think carefully about what rights are granted to NFT buyers,” says Ghaith Mahmoud, an attorney at the firm Latham & Watkins.

Right now, experts say NFT sales are something of a contractual Wild West. Goodwin Proctor’s Lam says that many of the NFT contracts he has seen are vague or even “internally conflicting” about what users can legally do with their purchase, leading to an increased risk of disputes.

Another area of NFTs that needs airtight contracts is live experiences, such as an NFT that grants access to a concert stream or even real-world tickets. What happens if a tour gets canceled? Can a user resell the right to access the concert to anyone?

“If you look at most traditional concert tickets or ticket giveaways, they’re usually accompanied by really lengthy legal terms,” says Lam. “Right now, you’re often not seeing that kind of language when these benefits are being offered in connection with an NFT. The more clarity you can provide reduces the risks of litigation.”

Clear All Necessary Rights

You can’t mint an NFT for intellectual property that you don’t own in the first place. Obvious, right? And yet, what rights to Reasonable Doubt Dash actually owns is at the core of his legal dispute with Jay-Z.

Experts say it’s a substantially more complicated problem in the world of music — where any given song has multiple copyrights, numerous co-authors and other rights holders, and artists have contractual obligations to labels and music publishers. All of these parties may need to sign off on an NFT project before it can proceed.

“It’s incumbent on the minter to conduct sound diligence and obtain the necessary consents and licenses from all parties holding IP in the artistic content sought to be embodied in the NFT,” says Nima Mohebbi, an attorney at Latham & Watkins. “Given the proliferation of NFT-based organizations and minting platforms just this year, it is not difficult to see an impending wave of litigation that could ensnare unwary minters.”

That prediction is already playing out in court. Although the case does not involve music, filmmaker Quentin Tarantino was sued by Miramax in November for selling NFTs linked to the script for his 1994 movie Pulp Fiction. And in January, the rapper Lil Yachty sued the NFT startup Opulous for using his name and image without his permission for an ad campaign tied to the platform’s launch.

Don’t Run Afoul Of Securities Law 

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 experts say it’s good to take extra steps to ensure that they don’t. In the most basic sense, that means always pitching NFTs to fans as a great creative experience, not as a tool for future financial gain.

“If I was an artist, I would never advertise these things as something that’s likely to increase in value or anything like that,” says Andrew Klungness, an attorney at the Silicon Valley law firm Fenwick & West. “I would urge fans to enjoy the content and pitch it as a way to connect with fans in a more direct way that blockchain allows.

“If the word ‘investment’ even comes to mind,” adds Klungness, “I’d make sure you have a very capable lawyer.”

The situation gets murkier in the case of an increasingly trendy arrangement: an NFT that entitles the holder to a stream of future royalties from a piece of copyrighted music. Those deals bear more similarities to a traditional financial product, and experts say they need to be treated more carefully. Partnering with a sophisticated platform that has experience navigating these securities issues is one way to avoid an SEC investigation.

“Simply selling a copyright interest is probably not a securities issue,” Klungness says, “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.”

Don’t Sell NFTs To Terrorists (Seriously)

The sale of NFTs, often to anonymous buyers, can reveal a few intimidating aspects of the law that musicians have probably never even considered, including federal laws designed to prevent money laundering and laws aimed at imposing sanctions on criminal groups and overseas threats.

Banks and other large financial institutions have best practices in place to prevent money laundering and avoid sanctioned entities, which range from known drug cartels to terrorist organizations and authoritarian regimes like North Korea. Sophisticated NFT platforms have adopted similar measures, and experts say artists should ensure their NFT partners have done so.

“There need to be protocols in place so that you have assurances about who is purchasing NFTs and where the funds are flowing,” says Perry of Covington & Burling. “If you’re a band out on the road selling shirts at your merch booth, you aren’t thinking about this stuff. But if you’re selling NFTs, you need to think about who is buying them and why.”