Jacob Martin has branded himself as the go-to lawyer in the world of NFTs. He’s been involved with the Sotheby’s auction, is working with newly formed DAOs, and is an expert in the legal issues surrounding NFTs.
“Whereas the average NFT is just a digital piece of art, or it’s a collectible, or it’s a whatever, the artist becomes more or less successful and that might make a thing more or less valuable. But, they don’t have direct control over the thing. They just made it and they sold it off…” (Timestamp: 19:16)
“The only spot where I see potential legal ramifications is fractionalized NFTs which are super interesting.” (Timestamp: 21:45)
How Jacob got into the NFT world
- Background: Jacob started off as an intern and research assistant for a law firm during the ICO boom. He’s a lawyer registered in the state of California. The Tezos securities lawsuit was assigned to him. He began attending crypto conferences and founded his own blotching company. He worked on building out smart contracts with wills and trusts. Afterward, he worked with other start-ups and came across some collectibles.
- Launching his start-up: He went into start-up mode. He began promoting on Clubhouse and Instagram and gained some key followers from the NFT space. Jacob was the only lawyer in the room. He’s made connections with big and small artists and techies. His business has brought him to big names like Christie’s and Sotheby’s.
- Learning about ICOs and tokens: With ICOs, when they sell to US citizens and are not offshore, there is no risk of litigation. Many blockchain companies run their entities elsewhere. Many tokens aren’t available to Americans unless they use platforms like Uniswap. Tezos sold tokens to someone in the US through the ICO. They were then sued in a US court. Jacob’s law firm worked with other ICO paperwork to figure out the crypto space.
Discussing tax issues in crypto
- Identifying legal issues: After reading a lot about cryptocurrencies, he gained a good understanding of the space. One of the first issues he worked on through his start-up was royalty splits and shared IP. If two people sell something and share the proceeds, most traders don’t consider things like writing off gas fees as expenses or filling out a 1099 form.
- NFT liabilities: Most NFT sellers don’t realize they need to pay taxes on their sales. It turned out that most people weren’t thinking about these questions. His work eventually moved on to look at IP modifications. For example, musicians who are under contracts. He’s currently working on an NFT copyright infringement lawsuit.
- Learning and breaking new ground: He’s learning to figure out issues as they come. In the last few months, he has been consulting Christie’s and Sotheby’s on Dapps. They hadn’t thought about it. He hadn’t considered himself a KYC/AML expert, but he’s become a filter between the centralized world and decentralized world.
Planning for future taxation
- The Sotheby’s sale: A traditional auction house allows people to sell their NFTs for the first time. They aren’t consulting an attorney to figure out some of these consignment terms. Platforms like Nifty Gateway are well built and positioned to take on taxation. But places like Opensea allow you to use a non-custodial wallet to make a sale.
- Tracking transactions: If the US government decides to say NFT platforms are like eBay, and classify them as real property or virtual assets, there will be KYC-AML added in. There will also be tax expectations on them. That said, Jacob is bullish on web 3 and believes people will keep developing things that don’t require that.
- Anonymity still possible: Some of the people he talks to online are totally anonymous. It would be difficult to send them tax documents or access their wallets.
Working with artist-friendly brands
- Protecting the small artist: Jacob has made clear to potential clients that he’s only working with artist-friendly brands. He won’t help a big company sue a small artist. His introduction to Christie’s was through a group of people who wanted to form a DAO. The law is so behind that if he speaks up to loudly, he could end up as a narc for the department of justice as a Web 3 expert.
- Dapper Lawsuit: It’s interesting because it’s real. It sounds like Top Shots moments are securities. The question is, are NFTs securities. The Dapper lawsuit says Top Shots are securities, not NFTs. They argue that Dapper is determinative of whether Top Shots do well. In other words, Dapper is a centralized entity and treating Top Shot moments like a stock.
- Sports cards’ value: Jacob doesn’t agree with this argument. He feels that if you purchase a sports card and pull a rare one, this has nothing to do with someone like Upper Deck being a good company. Their success doesn’t make the card more or less valuable. The card’s scarcity is what makes it valuable.
Investing for the future
- Are NFTs securities? Jacob believes this is about having a centralized power dynamic. The standard ERC-1155 or 721 tokens are not considered a security. It’s a digital asset. The legal definition is either legal property or virtual asset. It will get treated like a digital collectible the same way you might buy a fancy Porche or piece of art. If you resell it there are capital gains.
- Fractional NFTs: One place where NFTs could see legal ramifications is with fractionalized NFTs. Shares of a piece of art would need to be registered with the FCC. It will be interesting to see if this is the case in the virtual world.
- Creating new DOAs: The SCC doesn’t want to increase its burden. If anyone would look at wallets it would be the IRS. Jacob believes they will however need to create a workflow for someone bringing in a $10 million NFT. Masterworks and Rally already use that model. ERC-20 tokens sent out instead of shares could bring in questions about securities implications.
NFTs as virtual assets
- Securities implications: Jacob believes the securities implications will apply more to IP than to NFT. Every NFT has an originator. Several people have to sign off on it. One lawyer who’s working with large estates said that compliance talks are taking six to eight weeks to get through. They need to understand if these virtual assets are securities. It’s a lengthy process.
- Royalties and copyright: Several people may need to sign off on using an old clip from a movie or a song. Even a meme using an old clip, the artist or actor would need the production company to sign off on creating the NFT. With the present-day creation of an IP, the platform needs your permission to post and share the piece. This doesn’t give them permission to use it. There’s a difference between marketing and use.
- Shared rights for artists: For groups of creators, there should be agreements in place. Two artists for example will each have copyright. Then, the new piece will give them each a 50/50 stake. If it’s not transformative or layers, it’s not a new piece. If you created the piece with other collaborators, you’ll need their permission as well. You can then share the revenue.
Can you monetize your NFTs?
- Increasing value in NFTs: The quality of artists and lawyers is growing exponentially. Their value and intentionality have also increased. When selling an NFT, the first question is what did the buyer receive? If you buy an NFT, the standard terms of service say that when making the purchase you have no commercial rights.
- NFT monetization: Jacob has had several Cryptopunk owners ask him what they can do with it. There isn’t a license out there for their use. Questions around monetizing NFT assets aren’t something most creators are able to answer yet. Some have said the buyers can do whatever they want while others have set basic standards. Because Bored Apes has allowed its asset owners to do what they want, the demand and popularity have increased.
- How to connect: You can connect with Jacob on Twitter @thenftattorney
- You can also visit his website JTMtechlaw.com.