Non-fungible tokens (“NFT”) have revolutionized the way artists to sell their art; now artists are hoping that TVNs can revolutionize the way they funds their art. Recently, the sale of collectible NFTs funded the production of two television projects: Stoners cats and Gadgets. Stoners cats has raised around $ 8 million in NFT sales on the assumption that only those who buy Stoner catNFTs will be able to watch the program. Gadgets, on the other hand, promised that NFT holders will be able to determine how the show’s story progresses from episode to episode. While this new method of funding is exciting for artists and fans, it is important to consider the securities law implications that may arise.
What is an NFT?
First, we’ll start with the basics. An NFT is an intangible digital token that represents an item. This token is made up of unique data stored on a ledger using blockchain technology. Being “non-fungible” means that each token is unique. For example, cryptocurrencies like Bitcoin are considered “fungible” tokens because they function like money; a loonie is the same as all other loonies and can be replaced by similar tokens of equal value, such as 20 nickels1. NFTs are unique in that they are not reproducible or interchangeable in this way. Simply put, NFTs are digital collectibles.
NFT and ownership
When someone purchases an NFT of a work of art, they are purchasing a token that represents ownership of the art – not necessarily a part or an interest in the art itself. The common misconception surrounding property is that buyers own the real version of the asset. The reality is that owning a TVN is like buying a limited edition print of a painting: the buyer usually does not own the copyright to it, nor does he have the right to reproduce the painting at home. for resale or other commercial purposes. However, they do have this unique individual copy and corresponding Certificate of Authenticity. Likewise, in the case of the television financing mentioned above, TVN buyers do not own any part of the program or its potential profits; instead, they have a collectible NFT that comes with some tertiary benefits. (For more on NFTs and the entertainment industry, tune in to the next American Bar Association (ABA) discussion – Lost in Tokenization: Legal Implications of Non-fungible Tokens on Finance, Art, Property, and Culture).
Securities law considerations
Along with issues surrounding intellectual property rights, DTV ownership raises important considerations for Canadian securities laws. The offering of ownership or income streams from a business in association with DTVs related to entertainment products could trigger reseller registration or license fee requirements. It is therefore important for artists, agents or anyone working in the business of creating or selling TVN to first answer the question of whether the TVN they are selling can be a title.
Although many cryptocurrency offerings involve the sale of securities, the Canadian Securities Administrators (“CSA”) have indicated that a single token valued for entertainment or collection purposes is. not typically security.
To help understand some of the implications of Canadian securities laws for the sale of tokens, the CSA offers helpful advice on Staff Notice 46-308. The guidelines are based on the investment contract test (more commonly known in Canada as the Pacific coin test or in the United States as
Howey test), a token will be classified as a security when it involves (i) an investment of money (ii) in a joint venture (iii) with the expectation of a profit (iv) derived significantly from the efforts of others. 2
For many entertainment-related NFTs, the buyer determines the value of the token based on personal preferences over the unique characteristics of that token as a collector’s item. As a result, market forces, rather than the continued development of a business by the issuer or the promise of future profits from that business, determine the future market value of the token. If the unique characteristics of a token, and not the effort of others, determine its value, then it is likely that there is no joint venture and, therefore, it would not pass the test mentioned above. -above.
In the case of TV shows or other arts activities that raise money through the sale of NFT with perks or ancillary value, here are some common “red flags” that indicate that sales can be considered investment contracts or otherwise securities rather than mere tokens. First, pay attention to places where NFT owners seem to have perks that go beyond just owning a collectible, such as exclusive access to watch the show or having some creative control. Second, when the tokens are sold to raise capital, this will be a strong indicator of a security and could mean that buyers are not simply buying the tokens to appreciate their actual unique characteristics. And finally, when it can be said that the value of TVN is closely related to the success or failure of the show or the project itself, this could potentially indicate a joint venture. For example, if an NFT-funded TV show grants exclusive access to NFT holders, the price of those NFTs will increase along with the audience’s desire to watch the exclusive show, especially if that show receives favorable ratings or nominations. to rewards.
If the NFTs were found to be securities, their distribution may be subject to prospectus requirements, resale restrictions and brokerage registration requirements. Jurisdictional considerations for internationally offered DTVs should also be kept in mind. The CSA note that a Canadian securities regulator may have jurisdiction over transactions with investors residing outside of Canada where there is a real and substantial connection between the transaction and Canada. In light of these Canadian securities law concerns, it is important that artists and producers consult their legal counsel before proceeding with the minting and selling of TVN, especially as a means of funding. their projects.
1. Susan Abramovich et al.,
NFT: Why a picture is worth a thousand Bitcoins. Webinar (May 31, 2021).
2. Securities law implications for token offerings, CSA Staff Notice 46-308 (June 11, 2018), https://www.osc.ca/sites/default/files/pdfs/irps/csa_20180611_46-308_implications-for-offerings-of-tokens.pdf.
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