Structuring Your Agreements When Releasing your NFTs
NFTs are one of the hottest topics in the music industry, and understandably so. In just the first few months of 2021, NFTs generated over $60 million for the music industry. For a brand-new revenue stream that barely existed a year ago, that is extremely exciting! While I encourage every music creator and music business to dip their toe into the NFT waters, it is important to start taking some legal considerations into account before your next big NFT drop.
NOTE – If you are still figuring out what an NFT is, here is a helpful YouTube video explaining how NFTs work. Check it out and come back to learn the law.
In this article, I will explain strategies and potential areas of emphasis parties should be aware of when structuring agreements relating to NFTs.
Why am I doing this?
Before diving into the nuts and bolts of the legal issues, I want to touch on why I am writing this article (and these other NFT articles). There are three main reasons these articles are necessary:
First, as I explained earlier, the revenue generated in the early stages of NFTs is already significant. As the technology continues to improve, platforms become more efficient, and creators get more…creative, the revenue potential in the NFT market is endless. It is important to start looking seriously at NFTs both from a creative standpoint, a business standpoint, and a legal standpoint.
Second, NFTs already touch every facet of the music industry. Run a quick Google search for NFT examples in music, and you’ll come up with album sales, songwriters selling their publishing, ticketing/touring, merchandising, and more. If you don’t think NFTs affect your role in the industry, you’re wrong.
Third, the potential exists for layers of legal complexities wrapped around the sale of just one NFT (see the copyright issues discussed in my article here). I want those who are selling NFTs to know with certainty (a) what they are selling and (b) structure proper agreements with all parties involved to avoid potential disputes in the future.
Why do NFTs need to be addressed in contracts?
If you’ve heard me speak on NFTs before, you’ve heard me describe an NFT as being wrapped in layers of legal complexities. From the intellectual property being sold (copyrights, trademarks, name and likeness, etc.) to the contracts/rightsholders covering the NFT (label/publishing deals, management agreements, producer agreements, administration agreements) and everything in between.
Rather than simply selling NFTs and hoping it all works out with contracts drafted as they were in the past, it is better to insert proper language into your agreements to ensure that all parties involved have an understanding as to who has particular rights (e.g., decision making and royalty collection) and obligations (e.g., fees, creation, and distribution).
IMPORTANT NOTE – This article (and every other article) cannot cover every facet of structuring an agreement (ever!). Including proper language or choosing what should or should not be included in an agreement cannot be covered in an article. Never assume any agreement is “standard” or “boilerplate.” Every relationship and project is different, and every agreement should be treated the same way.
Direct and Indirect NFT Agreements
When I refer to addressing NFTs in your “agreements” in this article, you can do so in two different ways: (1) directly setting out the terms of an NFT release or (2) indirectly through other music industry agreements. Consider the following types:
Direct – An agreement that is addressing rights and obligations of certain parties relating to a defined NFT release, anticipated to happen in the near future or even a set release date.
Indirect – A common agreement in the music industry that should now address rights and obligations if an NFT is released in the future. For example, a record label contract addressing sound recordings released as an NFT. A label deal should now have language discussing if an NFT release is to happen, then these are the rights and obligations of the parties.
Scope and Parameters
Irrespective of whether you are structuring an agreement that is a direct or an indirect NFT agreement, the goal is to set forth the terms with as much clarity as possible to set the expectations of all parties’ rights and obligations (as is the goal with any agreement). In doing so, you must consider (1) the scope of the agreement and (2) the parameters of the agreement.
When I speak of scope, I am speaking of the broadness of a particular provision in an agreement. This can be the scope of revenue to the record label, the scope of authority over decision making, the scope of time for a certain party to continue to receive royalties, etc.
Let’s take, as a hypothetical, an artist manager and an artist. The artist has a standard commission structure with the manager, where the manager takes a commission on all revenue derived from agreements entered into during the term of the management agreement. The artist partners with an NFT music platform and releases an NFT that is a rare, never-before-seen photo of the artist backstage at a concert. The manager certainly takes his/her commission during the term of the agreement. What about when the agreement expires? What about those ongoing commissions received as the NFT continues to resell over time and the artist keeps receiving commissions from the resale (as is possible when selling/reselling NFTs, which is another great reason to sell NFTs!)? This is where defining the scope of the commission structure is essential.
Furthermore, what if the commissions overlap with what is being sold? Suppose the NFT being sold contains both the sale of the album and tickets to an upcoming show. How is the revenue split between the artist, label, manager, and any potential booking agent that may want a cut? This is a situation where a direct NFT agreement is likely going to be best to define everyone’s rights.
There are so many creative possibilities when it comes to releasing different types of NFTs, which creates so many different legal hypotheticals. This is why it is impossible to name every scenario in an article.
The parameters of the agreement are the provisions addressing the rights and obligations as to how to implement the agreement's obligations. For example, in a management agreement, the scope defines the length of the agreement and what the manager would receive a commission for, while the parameters define the manager’s responsibilities for the artist, how the revenue is received and paid out, etc.
When I think of defining the scope and parameters of an agreement, I think of the broadness of the scope being the “X” axis and the applicability of the parameters being the “Y” axis. This gives you the framing of the agreement to fill in the rest.
In a direct NFT agreement, once you have the scope set, you must determine the parameters as to how the NFT will be released. Of course, you do not need to include every single detail of the release, but you certainly should include those that are important to the parties. If the timing of the NFT release (or a series of releases) is important to the artist or the label, it should be included in the agreement. Here are some other potential items that may be parameters to include in your NFT agreements:
What platform will the NFT be released on? Is there exclusive use of an NFT platform? For example, when signing with a record label, do they exclusively use a specific platform for the sale of NFTs?
Who has final decision-making authority in the NFT creation process?
Will an NFT distribution service be used? Who will actually distribute the NFT?
Who will cover the gas fees? When you mint an NFT, you have to pay what are called gas fees on the etherium blockchain (which is the most popular blockchain currently used to sell NFTs). The fees fluctuate based on demand and can potentially exceed the amount you are selling your NFT for. Will there be a ceiling on fees?
As stated before, this is not an all-inclusive list, and every relationship and NFT release is different. Certainly….most definitely!....do not try to find a form NFT distribution agreement because it doesn’t exist (and “form” agreements cause more harm than good unless an attorney reviews it). These agreements can be structured very creatively for both sides, so please consult an attorney.
While a lot of the discussion in this article can apply to the principles of drafting any successful agreement between parties, it is important to express the importance of having one in the new world of NFTs. Many in the music industry are excited about the potential to make money with a new revenue stream, and rightfully so. But it’s important to clearly define everyone’s rights prior to releasing your NFTs to avoid issues arising in the future.
Colin is the founder of Whiskey Ghost Entertainment Law based in Nashville, TN. Colin has represented independent musicians, record labels and publishers with a wide array of representation including the drafting, review and negotiation of record/publishing deals, distribution and band agreements. He has also assisted in the formation of LLC’s, trademark registration and much more. If you have a legal question, please don’t hesitate to email Colin at email@example.com or call him at 615-721-2233.
This article does not create an attorney-client relationship between you and me. Your use of this website is intended for general information purposes only and is not legal advice or a substitute for legal counsel. You should not act upon any information contained on this website without seeking professional counsel, licensed to practice in your jurisdiction for a particular problem.