NFT – A digital opportunity for EP sponsors | Latham & Watkins LLP
Beyond creative works and consumer products, NFTs open up new avenues for the monetization of intellectual property in the tech, life sciences and pharmaceutical industries.
Non-fungible tokens (NFTs), unique crypto-assets stored on blockchain technology, have grown in popularity as artists, game companies, retailers and others seek new streams of monetization.
In October 2020, the sale for US $ 69 million of a work by digital artist Beeple at Christie’s set the tone for an increase in NFT activity. According to the Non-Fungible market tracker, NFT sales topped US $ 274 million in May 2021 alone, underscoring the strength of this emerging market. As consumers and businesses become more comfortable with digital, NFTs will open up new revenue opportunities for organizations across industries and provide a range of opportunities for PE sponsors.
More than a digital craze
The range of potential NFT applications is wide – the NBA’s platform for digital basketball cards has seen sales of over $ 230 million, while food brands including Taco Bell have sold their own range of NFT. Football teams have also launched NFTs this year and football leagues are set to follow. U.S. toy maker Mattel has confirmed plans to turn its collectible brands into NFT as it explores new revenue streams. Beyond creative works and consumer products, NFTs open up new avenues for the monetization of intellectual property in the tech, life sciences and pharmaceutical industries. Additionally, the asset class could pave the way for new membership, subscription and ticketing structures.
New types of service providers will be needed to support this activity, including depositories, payment service providers and trading platforms. This new class of companies emerging around the NFT ecosystem can prove to be attractive investments for traders. Cryptocurrency has presented a plethora of opportunities for financial sponsors and VCs in recent years, highlighted by the recent direct listing of the crypto exchange Coinbase. The world of NFT may well follow suit.
New legal issues
TVNs raise new legal questions. The distinction between rights to the DTV itself and the rights to the underlying digital content has legal implications and gives rise to various ownership and licensing structures. For example, some licenses in the NFT Marketplace give buyers the right to market the underlying content, while others do not.
Storage of the underlying digital content is a key issue. All parties should know who is responsible for keeping and securing relevant data. The cases of “carpet draw” – when the creators of NFT change the content associated with the token after it has been sold – highlight the potential challenges of this new market. While there are questions to consider, a series of technical solutions emerge to address these issues.
Avoid regulatory traps
Investors should consider the regulatory regime in which they operate, including the Know Your Customer and Anti-Money Laundering obligations. It is important to take into account the approaches of target companies to regulatory change in this rapidly evolving field, and the possibility that different regulatory frameworks will apply to activities carried out in different jurisdictions. The European Commission’s proposal for a crypto-asset markets regulation aims to regulate crypto-asset issuers and service providers in the EU, and the UK Treasury is considering changing the UK regulatory approach. In addition, crypto-assets qualifying as financial instruments, including tokenized stocks or bonds, may be regulated by existing securities frameworks, such as the European Markets in Financial Instruments Directive.
Future regulatory changes will offer the first PE players in the NFT ecosystem the opportunity to adapt and consolidate their position. As the asset class grows, we believe sponsors are well positioned to capitalize on an exciting growth area.