By Chris Castle
[This post first appeared on MusicTechPolicy.]
If you’ve been pitched to lend your name to an NFT platform or promotion, or if you are an NFT promoter who wants to attract artists to your program, there are some issues that should get addressed. Obviously, discuss all this with your lawyers since this isn’t legal advice, but the following are some issues that you may want to consider before you commit to anything.
As NFTs are priced in cryptocurrencies, a word about that. You should understand that cryptocurrencies use a huge amount of energy due to “mining” (See the Cambridge University bitcoin energy consumption index) and the current spike in the cost of energy is going to have an effect. Also realize that when someone tells you that an crypto enterprise is “green” you have to ask them what they mean exactly–for example, Google tells you that their data centers are “green” because they buy carbon offsets or use hydroelectric power from Oregon or wind farms in Nebraska (just ask Senators Ron Wyden and Ben Sasse), but that doesn’t mean that it doesn’t still take enough electricity to power Cincinnati in order to operate YouTube. There are no magic elves on golden flywheels producing electricity as if by magic. They still plug into the wall like everyone else.
1. What artist rights are being granted and to whom?
2. Does grant of rights match the project summary and are license agreement, smart contract, marketplace/auction TOS and cryptocurrency rules all consistent? Has a subject matter expert been engaged to produce a report stating and certifying that the smart contract code implements the actual deal or needs to be revised?
3. What royalty is paid and to whom and when? Does artist, previous owner or charity participate in resale revenue after initial sale? Are any state or federal relevant tax rules implicated? What have you done to keep NFT revenue as far away from MLC as possible? (Remember that Etherium vehicle Consensys is somehow involved with the MLC.)
4. Are there exploitation or marketing restrictions on the NFT that would prevent the NFT and artist name being used in ways that are offensive to the artist, at least during the artist’s lifetime? Could heirs enforce these rights?
5. Are there any third party payments involved like producer payments, production company overrides, or any third party rights involved, re-recording restrictions. Will any letter of direction be required, e.g., for producers?
6. Are you being asked to clear publishing? If someone is telling you that they have cleared publishing, has the publisher confirmed the license and are individual songwriters actually receiving a share of revenue? The tendency is that the major publishers “settle” these kinds of cases for a lump sum and prospective royalty, which may or may not be received by individual songwriters after multiple commissions being siphoned off the top.
7. When does NFT terminate? (On resale, transfer by owner, term of years)
8. What is the governing law and venue? (And how to enforce)
9. Who maintains the blockchain and who is responsible for policing it? What happens if they fail to do so? (See my post with Alan Graham on this subject.)
10. Is artist asked to make representations, warranties and indemnity? Can the artist make such reps and warranties?
11. Is indemnity capped?
12. Are there any active disputes among anyone in the chain on the NFT promoters’ side? (“Disputes” is any disagreements, including, but not limited to, litigation or threatened litigation.) Who will cover artist’s costs of defense?
13. Is there insurance on chain of title, failure to enforce the smart contract, nonpayment, business risk?
14. Can license agreement or smart contract be revised unilaterally?
15. Is the NFT or NFT collection comprised of “generative art” or artwork created by machines, algorithms, artificial intelligence, and related technologies (i.e., potentially not capable of copyright protection)? What are implications for name and likeness rights.
16. What assurances have been given to identify purchasers of NFTs to enforce terms or prosecute breaches for first or subsequent sales?
17. Are any union rules implicated (e.g., SAG-AFTRA Basic Agreement Par. 22A)? See my post on NFT union payments.
18. Is NFT or any NFT cash flows implicated in any sanctions placed on persons related to the Russian Federation? Given the strong reaction to Russia’s invasion of Ukraine, consider any implications if China were to invade Taiwan and similar actions were taken against China or China-based companies.
19. Has NFT seller or marketplace obtained legal opinion regarding whether the NFT constitutes a “security” that would require sale by a registered securities broker-dealer or other regulatory oversight?
20. Are any state securities laws, tax laws or regulations, or “doing business” laws implicated or reporting obligations triggered?
Each NFT raises its own questions, so this checklist is just a starting point.