Do You Need an NFT License Agreement Drafted? - Klein Moynihan Turco LLP

Why You Need an NFT License Agreement

Non-fungible tokens (“NFTs”) represent a rapidly-growing industry in the online space, with sales exceeding $10.7 billion in the third quarter of 2021 alone. NFTs are unique and frequently one-of-a-kind digital files, such as images or short videos, that use blockchain technology to establish verified proof of ownership.

If you are interested in creating and selling NFTs, you will need an NFT license agreement.

What is an NFT License Agreement?

NFT License agreements protect original creators’ intellectual property rights and financial interests in and to their NFTs even after other people buy such NFTs (otherwise known as “purchased NFTs”). NFT creators, in their licensing agreements, may set out exactly which rights original owners and buyers hold in purchased NFTs. In addition, NFT license agreements often allow original creators to continue to profit off their creations by requiring a set percentage of their subsequent resales to be paid to them.

NFT license agreements are coded into the NFTs’ respective blockchains (otherwise known as “smart contracts”). These smart contracts certify the authenticity of the NFTs and autonomously execute NFT license terms during any and all resale of the NFTs.

Designing an NFT License

NFT License agreements, like any contract, are highly customizable and can be drafted to fit your specific needs. The standard NFT License includes the following sections: 1. Definitions, 2. Ownership, 3. License, 4. Restrictions, and 5. Terms of License. Further, NFT license agreements may include additional provisions that cover linking wallets, liability, governing law, alternative dispute resolution, and physical experiences.

How Will Subsquent Purchasers Obtain Ownership of Your NFTs?

In addition to setting out intellectual property ownership rights, NFT licenses may include terms on how subsequent purchasers may obtain ownership of such NFTs. In NFT license contracts, creators may select the marketplace or marketplaces on which their NFTs can be resold.

There are three main types of NFT marketplaces: open marketplaces, curated marketplaces, and proprietary marketplaces. Open marketplaces, such as OpenSea, allow anyone to mint and sell NFTs. Curated marketplaces, such as Foundation, select the NFTs that they allow to be minted and sold on their platforms. Curated marketplaces aim to increase exclusivity and reduce fraud. NFT creators need to apply and be approved before they can sell on a curated marketplace. Proprietary marketplaces, such as Vee Friends, generally only offer NFTs created by their platform operators. 

Please note that certain marketplaces, especially curated marketplaces, may require creators to use specific NFT license terms or the marketplace’s entire licensing agreement (and nothing else).

What Can Purchasers Do With Your NFTs?

In the license section, NFT creators can lay out what rights buyers will have when they purchase your NFTs. NFT license agreements may specifically address purchasers’ rights to display, copy, and use such NFTs.

Typically, NFT license agreements will grant buyers “General Use” licenses to purchased NFTs. Under a general use license, purchasers typically receive a “worldwide, non-exclusive, non-transferable, royalty-free license to use, copy, and display the Art” that underlies the purchased NFTs for personal, non-commercial use or resale.

On the other hand, some NFT license agreements permit “Commercial Use” of the subject NFTs. Under a limited license, the CryptoKitties NFT License allows purchasers of their NFTs to commercialize their own derivative merchandise (e.g., T-shirts) with such NFTs as long as purchasers do not earn yearly gross revenue of more than $100,000 from such sales.

Earn Royalties on the Resale of Your NFTs

In NFT license agreements, creators may choose to include a provision that explains the fees and royalties associated with the initial sale and subsequent resales of the NFTs. Creators may include provisions that require subsequent purchasers to pay a royalty or percentage of the sales to the original creator. In Vee Friends NFT license agreement, for example, NFT purchasers must “acknowledge and agree that [Vee Friends, LLC] receives 10% of every subsequent sale of a VFNFT (“Royalty”).”

Are You Interested in Attaching a Physical Experience to Your NFT?

“Experience opportunities” are rare, but interesting, provisions that have been included in some NFT license agreements of late. Creators may choose to include provisions in their NTF licenses that attach specific physical experience opportunities to certain NFTs. Vee Friends is the most notable NFT platform with a physical experience provision included in its NFT license contract. The Vee Friends license agreement explains that certain VFNFTs may include special experience opportunities and, to that end, it includes a link to a separate “Experience Terms” agreement. The physical experiences attached to Vee Friends LLC’s NFTs include admission to VeeCon (“an annual conference focused on business, marketing, ideas, creativity, entrepreneurship, innovation and competition. . . .”) and a variety of meetups with the NFTs’ creator. 

Do You Need an NFT License Agreement?

If you are planning on creating and selling NFTs on the open market or via your own proprietary marketplace, you will need an NFT license agreement.

If you are interested in learning more about this topic or require assistance in connection with preparing an NFT license agreement, please e-mail us at info@kleinmoynihan.com, or call us at (212) 246-0900.

The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney.  Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney.

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