Scan the headlines on any given day and you’re likely to come across stories about NIL rights and NFTs, both oftentimes selling for jaw-dropping amounts of money (at least before the cratering cryptocurrency market took a bite out of NFT valuations). Until recently, however, these two acronyms—which’ve become part of our daily vernacular—have rarely been uttered in the same breath. That’s no longer the case.
New laws creating previously unheard-of opportunities for student-athletes to sell the rights to their names, images and likenesses rights and cash in on their notoriety have proliferated in lockstep with companies looking to leverage non-fungible tokens as a marketing tool. The result: a slew of NFT deals between brands—which still see NFTs as promising for customer engagement despite the crypto downturn—and collegiate (and even high school) stars flexing their NIL muscles.
The University of Iowa’s Luka Garza and Gonzaga’s Jalen Suggs were pioneers when they minted NFTs just after finishing their final seasons in the NCAA back in March 2021. Since then, many student-athletes have taken their lead, including Ga’Quincy “Kool-Aid” McKinstry of the University of Alabama, who just about a year ago came to terms on a signing day NFT with Kraft Foods, Inc., makers of the Kool-Aid drink.
By some accounts, corporations have earmarked more cash toward NFTs than any other segment of the NIL market. But given the tenuous crypto landscape and relative nascency of NFT-based NIL deals, the burning question is whether brands will stay the course. All indications suggest the answer to be yes, in which case there are a variety of legal considerations for these companies to take into account.
The same is true for athletes and athletic departments given that NFTs are also a vehicle by which students can monetize their personal brands—even, in some cases, without the need for negotiating sponsorship deals. Toward that end, several major basketball programs—the University of Kansas and University of Kentucky, among them—have announced NFT deals; dozens of top collegians have signed with The Player’s Lounge, an NFT-backed community for college fans; and former NFL star Tim Tebow launched a company focused on creating NFTs through a partnership with the INFLCR+ Local Exchange.
Consequently, all participants in the NIL/NFT game would be wise to keep all of the following top of mind.
SEC Also Stands for Security and Exchange Commission
For many, NFTs are speculative assets, purchased as investments assuming their values will increase over time, in which case they can be sold at a profit. As such, despite their digital
characteristics, NFTs run the risk of being considered “securities” for purposes of their treatment under the law. Enter the SEC—no, not the Southeastern Conference.
Under the Securities Act of 1933, a security is essentially any type of negotiable instrument that represents some type of financial value. Some that immediately come to mind include fungible investments like stocks and bonds. But the definition of securities as set forth by the U.S. Supreme Court also includes “investment contracts,” meaning an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others." This so-called Howey Test means that release of an NFT could implicate federal securities law.
For instance, should an NFT be purchased with the intent of licensing the underlying asset, or reselling copies for profit, then securities laws could potentially come into play. And if characterized as a security after satisfying the Howey analysis, any given NIL-related NFT would be subject to heavy duty scrutiny and regulation by the SEC, particularly when it comes time to sell the token. In that instance, the sale would require registration with the SEC, unless an exemption under federal securities law applied, and the NFT would fall under state “blue sky” laws. There is more. Platforms facilitating any NFT transaction—including the likes of the aforementioned universities and Player’s Lounge—might have to register as a securities exchange, alternative trading system, and/or as a broker-dealer.
Intellectual property interests, namely copyrights, should always be a topic flashing brightly on the radar screens of anyone dabbling in the NFT marketplace. Indeed, parties to an NFT transaction must understand the importance of obtaining appropriate IP rights prior to consummating an exchange.
To be clear, NFT creators have to tread lightly when leveraging the work of others. More specifically, permission must be obtained from the owner of a copyright before a third-party creation is incorporated into an NFT, especially one positioned for sale. The failure to do so could subject the originator of an NFT—be it a brand, university or student-athlete—to legal action and financial exposure in the form of copyright infringement litigation. By way of example, this could happen where an NFT incorporates the logo or other IP of a school or athletic conference.
Student-athletes and their advisors must remember that tax implications follow most every transaction, and that includes the exchange of NFTs. When selling these digital tokens, tax laws apply and need to be followed to avoid any discrepancies with the IRS.
NFT deals are typically considered to be barter transactions for tax purposes, as tokens are generally characterized as property, as opposed to currency, by the Internal Revenue Service.
This means that the fair market value of these assets must be reported on tax returns as income, and sales are to be set forth as capital gains.
For creators, tax repercussions may be ongoing. Another extraordinary aspect of NFTs is a feature that allows digital artists and other originators to be paid a percentage whenever the tokens they created are resold. Thus, NFTs can function as an annuity for their creators, who may participate in financial gains over time, thus triggering the potential of future taxation.
NIL Compliance +
With the advent of NIL laws have come compliance obligations and other miscellaneous concerns to be contemplated by those ready to ink an NFT deal.
Agreements between NFT creators, student-athletes, brands and/or exchanges must comply with all applicable state laws, not to mention SEC regulations and Federal Trade Commission (FTC) rules governing the advertising of products and services. Likewise, NFT transactions should not conflict with university contracts, policies or procedures, including any restrictions related to the use of a school’s IP.
Given the growing popularity, intricacies and nuances of NFTs, university compliance departments would be wise to train their employees on the ins and outs of these digital assets, the federal and state laws that apply to them, athletic conference rules and regulations, and the value and place of NFTs within a student-athlete’s portfolio of NIL activity.
To be sure, the market for NIL rights and NFTs is still in its infancy and it remains to be seen the extent to which the two together will be leveraged by brands, athletes, colleges and universities and related NFT platforms. That being said, no matter how these relatively new marketing vehicles continue to evolve, the legal obligations they trigger should never be ignored.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.