A Checklist Of Legal Considerations For The NFT Marketplace
This checklist should help those involved in creating NFT marketplaces navigate the legal metaverse.
By Catherine Zhu and Louis Lehot
With the growing interest from consumers and asset managers, investors as well as entrepreneurs interested in digital assets, we have created this checklist for monetizing items with unique artistic content characteristics through nonfungible tokens (NFTs).
We have seen businesses that aggregate content to be monetized on an NFT, while others mint the tokens or build NFT marketplaces, and many more that intermediate payment transactions between the creators, the licensors, the marketplaces, and the buyers, the sellers and the exchanges upon which they trade.
Each of these types of businesses, and the transactions in which they participate, will need to consider the legal ramifications of still-developing law, policy and regulation applicable to each link in the chain of NFT commerce.
But first, a quick primer: An NFT marketplace is a platform that connects content creators with NFT buyers with NFT sellers. Sellers mint NFT tokens with the created digital asset in this platform, and buyers can browse listed assets and buy or participate in an NFT auction. There are primary and secondary sales of NFTs in the marketplace with differing transaction costs depending on how the marketplace operates and who facilitates the sale.
With NFTs expanding into the mainstream consciousness, what are some key legal, policy and regulatory considerations you need to be aware of?
Key legal considerations when building an NFT marketplace
- Formation: You’ll need to form a corporate entity before launching a marketplace. This will offer your business the most substantial liability protection, greater ability and credibility when seeking financing from external sources.
- Conduct Code: Most NFTs, given the predominance of user-generated content and transactions in NFT marketplaces, include an extra layer of legal restrictions in the form of codes of conduct to govern interactions on the platform.
- Smart Contracts: The unique digital creation must be independently identifiable, with ownership transferable within the smart contract. Creators should design-in the economics of trading: How much for a primary sale, how much for secondary sales, royalties, transaction costs and other features of the aftermarket to enable trading, with funds flowing to the appropriate parties by design.
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Catherine Zhu and Louis Lehot are business lawyers at Foley & Lardner LLP in Silicon Valley. Zhu advises web 3.0 companies on business expansion, go-to-market and commercialization, IP licensing, and data privacy compliance, governance, and risk management. Lehot is a member of Foley’s NFT taskforce. He assists and advises clients at all stages of their lifecycle.
Illustration: Dom Guzman