In their practices, corporate finance lawyers typically focus on private investments in public and private for-profit businesses. With the introduction of more blockchain applications, however, the structure and implementation of coin and token offerings have also become logical areas for business activity, legal inquiry, and related commentary, research, and policymaking. Specifically, there has been much ado about whether coin and token offerings used to finance for-profit businesses constitute securities offerings under Section 5 of the Securities Act of 1933, as amended.
Nonprofit firms are also generating operating funds through blockchain transactions, although these efforts may have escaped notice. One way they are doing so is by employing, directly or indirectly, the offer or sale of non-fungible tokens or NFTs (what I describe as a type of “secure, digital assets minted, sold, and acquired on a blockchain”) to generate donations or proceeds that benefit the nonprofit. A parallel type of financing is also used in the political sphere to fund campaigns for individual candidates for office and political committees. These non-investment financings using NFTs do not raise the same set of legal issues as the offer and sale of coins or tokens that represent investment interests in a common enterprise, where the offerees may expect profits generated wholly or principally by the efforts of others.
Nevertheless, the use of NFTs in generating non-investment funding does prompt legal concerns. In a recent book chapter, I explore NFT financings in the nonprofit and political realm as an extension of my earlier broad-based work on crowdfunding. My research, as conveyed in the chapter, aims to explain and comment on the use of NFTs in financing nonprofits, political campaigns, and political committees.
As in the for-profit investment funding environment, engagement with the internet in seeking and obtaining financing holds the promise of new funders and new opportunities for funding. The approach is similar to crowdfunding, with a key difference being that fundraising over a blockchain may limit or eliminate the need for traditional intermediaries and, correspondingly, decrease (or at least change the nature of) regulatory and other costs.
In general, NFTs are used in nonprofit and political fundraising as premiums or rewards offered in exchange for funding, typically (although not exclusively) through the conveyance of cryptocurrency on a blockchain directly or indirectly to the nonprofit, campaign, or committee seeking financing. Several fundraising models have been developed, and industry players have emerged to serve the resulting markets. Yet, there are questions about the financial value of NFTs that create operational qualms and legal difficulties for these market participants and those that regulate transactions involving NFTs.
Ultimately, the chapter offers guidance and reflections on core issues under applicable law and regulation and observations about legal and regulatory questions and approaches relevant to non-investment finance using NFTs. Although securities regulation is not typically applicable in NFT nonprofit and political financings, issues arise under contract law, commercial law, consumer protection law, federal and state anti-fraud laws of various kinds, and other laws governing asset transfers. Causes of action in these areas would logically arise out of a failure of the nonprofit, campaign, or committee to accurately or fully disclose the terms of the NFT offer or deliver the NFT as promised. NFT conveyances also routinely raise questions under intellectual property law that may factor into their use in non-investment finance settings. Moreover, nonprofit NFT funding models may raise cryptocurrency and nonprofit questions under federal and state income tax law, and political NFT financings naturally engage questions under federal and state campaign finance laws.
The non-investment offering of NFTs is an understudied, undertheorized, and largely unknown part of the finance world. Although nonprofit and campaign financings using NFTs represent a relatively new and minor funding method at present, the existence and persistence of non-investment NFT offerings in these contexts raise unanswered legal questions that bear more scrutiny, especially to the extent that these fundraising markets may grow. Foundational to some identified legal issues is the lack of a consistent, standard method for valuing NFTs of various kinds, which may present a barrier to successful regulatory innovation.
Federal regulators recognize this to a degree, but they have not yet responded in a comprehensive or cohesive way. In the absence of appropriately targeted federal regulatory interventions, compliance with and enforcement of existing laws will remain challenging, and innovations in non-investment NFT finance markets may stall or fail.
My chapter only begins to address these matters. By identifying and describing non-investment financings using NFTs and the related regulatory environments in which these financings take place, I hope to lay a foundation for further work. That additional work should include theorizing aspects of the non-investment financing markets for nonprofits, political campaigns, and political committees, isolating applicable and desired policy considerations, and deeply inspecting and interpreting relevant law and regulation.
This post comes to us from Professor Joan MacLeod Heminway, the Rick Rose Distinguished Professor of Law at the University of Tennessee College of Law and interim director of its Institute for Professional Leadership. It is based on her recent book chapter, “Non-Investment Finance in an NFT World,” forthcoming in The Cambridge Handbook for the Law and Policy of NFTs, edited by Nizan Geslevich Packin and available here.