\n<\/p>\n
Non-fungible tokens (“NFTs”) have revolutionized how
First, we’ll start with the basics. An NFT is an intangible
When someone buys an NFT of a work of art, they purchase a token
Alongside issues surrounding IP rights, NFT ownership raises
While many cryptocurrency offerings do involve the sales of
To help understand some Canadian securities law implications for
For many entertainment-related NFTs, the purchaser determines
In the case of television shows or other artistic endeavours
If the NFTs were found to be securities, their distribution
Footnotes<\/strong><\/p>\n 1<\/a>.\u00a0Susan Abramovitch et al.,
2<\/a>.\u00a0Securities Law
“Read the original article on GowlingWLG.com<\/a>“.<\/p>\n
\nartists sell<\/em> their art; now, artists are hoping that NFTs
\ncan revolutionize how they fund<\/em> their art. Recently, the
\nsale of collectible NFTs has funded the production of two
\ntelevision projects: Stoner Cats<\/em> and The
\nGimmicks<\/em>. Stoner Cats<\/em> raised around $8 million in NFT
\nsales on the premise that only those that purchase Stoner
\nCat<\/em>NFTs will be able to watch the show. The Gimmicks<\/em>,
\non the other hand,<\/em> has promised that NFT holders will be
\nable to determine how the show’s story progresses from episode
\nto episode. While this new way of funding is exciting for artists
\nand fans alike, it is important to consider the securities law
\nimplications that may arise.<\/p>\nWhat is an NFT?<\/h3>\n
\ndigital token that represents an item. That token is composed of
\nunique data stored on a ledger using blockchain technology. Being
\n“non-fungible” means that each token is one-of-a-kind.
\nFor instance, cryptocurrencies like Bitcoin are considered
\n“fungible” tokens because they function like money; a
\nloonie is the same as every other loonie and can be substituted for
\nsimilar tokens of equal value, such as 20 nickels1<\/a><\/sup>. NFTs are unique in that they are not
\nreplicable or interchangeable in such a way. Simply put, NFTs are
\ndigital collectibles.<\/p>\nNFTs and ownership<\/h3>\n
\nthat represents ownership of the art – not necessarily a portion of
\nor an interest in the art itself. The common misconception
\nsurrounding ownership is that buyers own the real-life version of
\nthe asset. The reality is that owning an NFT is like buying a
\nlimited-edition print of a painting: the buyer does not typically
\nown the copyright to it, nor does the buyer have the right to
\nreproduce the painting for resale or other commercial purposes.
\nThey do, however, own that unique individual copy and that
\ncertificate of authenticity to match. Similarly, in the case of the
\ntelevision funding mentioned above, the NFT buyers do not own a
\nportion of the show or its potential profits; rather, they own a
\ncollectible NFT that comes with certain tertiary benefits. (For
\nmore on NFTs and the entertainment industry, tune in to the
\nupcoming American Bar Association (ABA) discussion – Lost in Tokenization: Legal Implications of
\nNon-Fungible Tokens on Finance, Art, Property, and
\nCulture<\/a>).<\/p>\nSecurities law considerations<\/h3>\n
\nimportant considerations for Canadian securities laws. The offer of
\nownership of or income streams from a venture in association with
\nNFTs connected to entertainment products might trigger requirements
\nfor dealer registration or rights to license. It is therefore
\nimportant for artists, agents, or anyone in the business of
\ncreating or selling NFTs to first answer the question of whether or
\nnot the NFT that they are selling might be a security.<\/p>\n
\nsecurities, the Canadian Securities Administrators
\n(“CSA”) has advised that a unique token valued for its
\nentertainment or collectible purposes is not
\ntypically<\/strong> a security.<\/p>\n
\nselling tokens, the CSA offers helpful guidance in Staff Notice 46-308<\/a>. The guidance is based on
\nthe investment contract test (referred to more commonly in Canada
\nas the Pacific Coin<\/em> test or in the United States as the
\nHowey<\/em> test), a token will be classified as a security
\nwhere it involves (i) an investment of money (ii) in a common
\nenterprise (iii) with the expectation of profit (iv) to come
\nsignificantly from the efforts of others. 2<\/a><\/sup><\/p>\n
\nthe value of the token based on their own personal preferences in
\nrelation to the unique characteristics of that token as a
\ncollectible item. Accordingly, market forces, rather than the
\ncontinued development of a business by the issuer or the promise of
\nfuture profits from that enterprise, determines the token’s
\nfuture market value. If a token’s unique characteristics, and
\nnot the effort of others, determine its value, then it is likely
\nthat there is no common enterprise and therefore, it would not
\nsatisfy the test mentioned above.<\/p>\n
\nraising funds through the sale of NFTs with ancillary benefits or
\nvalue, here are some common “red flags” that indicate
\nthat the sales might be considered investments contracts or
\notherwise securities rather than mere tokens. First, watch out for
\nwhere the NFT owners appear to receive benefits beyond merely
\nowning a collectible, such as exclusive access to watch the show or
\nhaving some creative control. Second, where the tokens are being
\nsold to raise capital, this will be a strong indicator of a
\nsecurity and could mean that the purchasers are not merely
\npurchasing the tokens in appreciation of their actual unique
\ncharacteristics. And finally, where it may be said that the value
\nof the NFT is closely tied to the success or failure of the show or
\nproject itself, this could potentially indicate a common
\nenterprise. For example, if a television show funded through NFTs
\ngrants exclusive access to NFT holders, then the price of those
\nNFTs will increase alongside the public’s desire to watch the
\nexclusive show, especially if that show receives favourable ratings
\nor award nominations.<\/p>\n
\ncould be subject to prospectus requirements, resale restrictions
\nand dealer registration requirements. Jurisdictional considerations
\nwould also need to be kept in mind for NFTs that are offered
\ninternationally. The CSA notes that a Canadian securities
\nregulatory authority may have jurisdiction over trades to investors
\nresiding outside of Canada where there is a real and substantial
\nconnection between the transaction and Canada. Given these Canadian
\nsecurities law concerns, it is important for artists and producers
\nto consult their legal counsel before moving forward with minting
\nand selling NFTs, especially as a means to fund their projects.<\/p>\n
\nNFTs: Why a picture is worth a thousand Bitcoins<\/em>. Webinar
\n(May 31, 2021).<\/small><\/p>\n
\nImplications for Offerings of Tokens,<\/em> CSA Staff Notice 46-308
\n(June 11, 2018), https:\/\/www.osc.ca\/sites\/default\/files\/pdfs\/irps\/csa_20180611_46-308_implications-for-offerings-of-tokens.pdf<\/a>.<\/small><\/p>\n