Legal and Regulatory Considerations When Dealing with NFTs in Sports

Overview

NFTs (Non-fungible tokens) are an emerging class of digital assets. They have piqued the interest of both consumers and investors. Athletes, celebrities, and artists have started exploring NFT technology to monetize their brand, image, or work. Even though this asset class is in its infancy, legal and regulatory challenges that transpire around it are genuine. This article outlines critical legal considerations and implications related to NFTs in sports for athletes as they plan and implement their NFT plan.

Determining Whether an NFT is a Security or Not?

The reason for which an NFT comes into existence and then sold is one of the most crucial considerations in determining whether it is a security or not. For instance, an NFT is a representation of a tangible or intangible asset like a photograph or piece of digital art. If its owner auctions it in the form of a collectible with the authenticity powered by blockchain for public assurance, it is unlikely to be categorized as a security. However, if an NFT development and offering occurs as a mechanism for the general public to make investment returns, it is more likely to be classified as a security.

NFT makers aren’t the only ones who have to worry about whether or not an NFT is considered a security. Operators of NFT exchanges must also evaluate this problem carefully. If an NFT exchange platform makes a market for an NFT that is a security without adhering to regulations, it might face SEC penalties for running an unregistered securities exchange.

NFT and Rules and Regulations

Star athletes like Tom Brady, Patrick Mahomes, Rob Gronkowski, and soccer legend Pelé are jumping on the NFT bandwagon by forming their firms and producing their own NFT collections. Indeed, the NFTs market must be considered big business when millions of dollars are involved. So what do laws, rules, and regulations have to say about NFTs and sports?

Copyright Law

Copyright law in the United States necessitates assigning a certificate of copyright and ownership for original work to content owners. It gives owners the ability to restrict who copies, sells, licenses, or transfers their original content and who can create derivative works from the original work. Let’s understand how copyright law applies to NFTs.

The assumption is that, for instance, when you buy an NBA Top Shot Moment or one of the recently released Pelé NFTs, you are just purchasing ownership in the NFT and not its copyright.

A buyer does not have copyright ownership unless there is a formal contract with precise conditions specifying that the seller has assigned the copyright to the buyer. What exactly does this imply? It implies that a customer can’t lawfully produce copies of NFTs or sell, license, or transfer the NFTs’ copyright. On the other hand, a buyer must seek evidence that a seller owns an asset and has the right to create NFTs of the content. In summary, purchasers need to understand the conditions of sale detailed by an NFT marketplace. They must know what they’re purchasing and what kind of rights that they have gained.

NFTs and Name, Image, and Likeness (NIL) Rights

In the sports industry, NIL rights have become the talk of the town. And there are some relations between them and NFTs. When you combine NFTs with NIL, you have another opportunity for up-and-coming athletes to profit from their name, image, and likeness via auctionable digital collectibles and NFT contracts.

Indeed, the efforts to permit NCAA players to profit off their name, image, and likeness are growing. Currently, collegiate athletes are not allowed to receive any pay.

However, things may change soon as states have started enacting their NIL legislations, along with proposal submission at federal levels. Sooner or later, college athletes can collect remuneration for their name, image, and likeness through blockchain and NFT-enabled marketing partnership, collaboration, and endorsement contracts.

Conclusion

NFT is still an emerging concept. Thus, sports clubs, leagues, athletes, or investors dealing with NFTs must consult a securities lawyer. They must validate that there are no possible difficulties with an NFT’s strategy irrespective of whether it is considered a security and subject to securities regulation or not. It is also crucial to grasp the legal aspects that limit and enable them.

As NFTs grow in popularity, sports leagues and individuals will have more options to sell themselves, and thus, they must be prepared to deal with legal implications.
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