Digital Currency Offers New Way to Securitize IP

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By Malathi Nayak

Big-ticket product endorsements and licensing deals aren’t the only way for music artists and athletes to make money from their intellectual property—they can also issue blockchain-based securities to raise cash.

Liquidity in markets for cryptocurrencies such as bitcoin and Ethereum is opening the door for entertainers and athletes to issue digital tokens in exchange for funding, Thomas Franklin, a partner at Kilpatrick Townsend & Stockton LLP and Emma Channing, general counsel of the Argon Group, a digital finance investment bank, said April 5 at the American Bar Association’s IP law conference.

The tokens are validated by blockchain, a public ledger used for the authentication of digital currency transactions, and backed by copyright, trademark or other IP assets. The validation by blockchain is the same as for bitcoin or other cryptocurrencies.

Video game companies and television studios have led the way by raising $260 million through 60 these IP-backed digital currency offerings in 2016, according to Channing. The companies are expected to raise $700 million to $1 billion this year, she said.

The offerings are a “very easy way to raise non-diluted capital,” Channing said. “Ten billion (in digital currency) is out there waiting to be spent on something.”

Investors can cash in tokens received through the offerings at digital currency exchanges or buy goods from vendors who accept digital currency payments such as Amazon.com and Tesla Inc., Franklin said.

IP-backed digital currency offerings are best-suited for artists and athletes looking to raise between $5 million and $10 million, Channing said. The tokens are issued through smart contracts, which are regulated in the U.S. by the Securities and Exchange Commission. However, it is still not clear how regulators will treat them.

Regulators Have Not Weighed In

“Neither the SEC or the Department of Justice has brought a case yet.” she said. “This whole area will be in the gray until the SEC steps into a more active role in the next two or three years.”

Despite the legal uncertainty, SingularDTV pulled off an “initial coin offering of IP and use rights” in October, Channing said. It raised $7.7 million in Ethereum currency in 17 minutes to develop video content for its upcoming blockchain-based video service, Channing said. SingularDTV is building a product that will let consumers use digital currency to view programming.

Using another approach, digital offerings can be designed to comply with a 2012 federal law aimed at helping small businesses and startups raise funds.

That’s how video game maker Fig Publishing Inc. raised $3.1 million in six days to fund the development of a role-playing game called “Wasteland 3,” Channing said.

Fig raised funds in U.S. dollars in exchange for digital tokens in compliance with the Jumpstart Our Business Startups Act 2012. Investors are entitled to use digital tokens in the video game and a 20 to 50 percent cut in future profits, Channing said.

In contrast, SingularDTV told potential investors that its offering, which accepted Ethereum currency in return for digital tokens, was not subject to any securities law, she said.

Who owns the IP?

Regulators are looking for test cases and cryptocurrency holders are experimenting with such offerings, Franklin said.

While there is regulatory uncertainty around digital currency-based IP offerings, lawyers advising artists and athletes must ensure that IP rights are protected, Franklin said. Lawyers must ask, “who owns the IP?” he said.

Recording artists may have sold IP rights to a label or a band could see those rights questioned if its group disbands or a member dies, he said. Another challenge is that laws vary by jurisdiction and copyright laws in the U.S. have changed at various times, he said.

Lawyers have to “parse all of these things to make sure the actual asset underlying (the offerings) is legal,” Franklin said.

To contact the reporter on this story: Malathi Nayak in Washington at mnayak@bna.com

To contact the editor responsible for this story: Mike Wilczek at mwilczek@bna.com

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