Launching an NFT Project – The Essential Legal Elements Part 4 – Corporate Structure

Posted onMay 9, 2022

In Part 4 of our series on the essential legal elements of an NFT project, we’ll be looking at why it’s important to have a Corporate Structure in mind when launching a new crypto project.

Unlimited Personal Liability

As we explored in Part 3 of this series, a smart contract will set out the terms of the relationship between the buyer and the seller of an NFT: with the initial sale of NFT tokens in a drop it’s important to define the seller.

Who is the seller? There are often multiple parties involved in an NFT project - the artist(s), marketing and PR, the programmer, a funder, and others. It is unlikely that all (or even any) of those parties would want to be classed as the ‘seller’, individually contractually bound and liable to each and every buyer of the NFTs.

Being contractually bound means owing liabilities to the other party to the contract: it is the party sued if what is promised with the NFT is not delivered; there may be a fault in the smart contract, a failure of drafting which exposes the seller to liability, for example. Further, outside of contractual rights, consumer rights trump other contractual exclusions, it is not sufficient to simply plaster a ‘we exclude all liability’ notice to the project and its smart contracts.

Limited Liability

Therefore it’s necessary to consider ways in which to limit liability for the NFT sellers.

The normal way in which the persons behind a business will seek to limit their liability, is to put a corporate entity in place, such as a limited company, through which they trade. As the name suggests (absent fraud) liability to other parties will stop with the company.

It is important to note however that a limited company may not be appropriate for all businesses and an LLP (limited liability partnership) or other corporate structure may be more appropriate, so it is always advised that legal advice is sought on this well in advance of the NFT drop. There will also be issues of jurisdiction (geographic location) and tax to consider, again by speaking with an expert.

Advantages of Limited Liability

Having a separate legal entity in place through which the business of the NFT project is conducted has several advantages:

1. Shareholding can be allocated to the parties contributing to the project (PR, marketing, programming etc.) and a shareholders’ agreement can regulate their relationships within the company. Whilst all parties in an NFT project may be ‘friends’ with a ‘common interest’ at the outset, when issues such as money (large sums are often generated by NFT sales) and the direction of the brand are raised, cracks can quickly develop (as a litigator, I have seen many of these).

It is recommended that you obtain expert advice as to a shareholders agreement and other documentation when establishing a trading entity, to balance competing and sometimes conflicting interests of the various parties and ensure the business is run as intended.

1. If future investment is sought for the NFT project (for another drop, or merchandising or other collaborations for example) then it is easier to invest in an existing company with clearly defined legal parameters, reporting profit/loss accounts and where further shareholding can be allocated in return for an injection of funds.
2. When contracting with third parties for merchandising or licensing rights (to use the name/logo/artwork from the NFTs) a contract can be put in place with the company, again limiting liability for those in the business.
3. It is not only contracting with third parties which will be necessary, if we take the example of an artist, who is creating artwork for the NFT project, it is recommended a licence agreement (or assignment) of intellectual property rights is put in place, and it is normal to licence rights to the company creating the NFTs.

Conclusion

Informed legal advice is recommended on this element to determine the most appropriate legal entity for the business and put in place appropriate/necessary paperwork including agreements setting out the relationships, rights and obligations of the parties.

In Part 5 of this series, we will consider the Terms of Business element of an NFT project, why it’s important to carefully consider what terms are used in connection with your project in respect of clearly defining the rights of consumers and your company, limiting liability.