Using NFTS to Jump Start Your Entrepreneurial Ventures

By: Jeremy Garcia

The year 2021 will be remembered for many reasons: Kamala Harris became the U.S.’s first female African American Vice-President, Netflix’s Squid Games shocked audiences, Omicron arrived, the January 6 Capitol Riots, and the NFT craze began.

Non-fungible tokens or “NFTs” have attracted the likes of Sotheby’s, Snoop Dog, investors, and small business owners.  As of December 2021, Pak’s the Merge is the most expensive NFT sold for $91.8 million.  Imagine owning a share of that to jump-start your business venture.  But how can you make NFTs work for you?

what are nfts and how do they generate revenue for your business?

NFTs are a class of “one-of-a-kind” crypto assets and can be artwork, virtual real estate, music, files, and are created on a blockchain.  NFTs are valued on their rarity, making them non-fungible, unlike bitcoins or fiat money which hold the same value (fungible).  The advantage of NFTs are that ownership and authenticity can be verified because blockchain technology is hard to hack or modify.

the general overview

You sell NFTs by selecting the appropriate marketplace and then funding a crypto wallet to “mint your NFT” to upload it onto the marketplace.  You then choose the option to sell and follow the appropriate prompts to list your asset, including listing time, price, the type of sale (if you want to sell shares of your asset), currency accepted, and more.  The marketplace will calculate the “gas fees” or transaction fees that compensate blockchain miners who add the NFT code to the blockchain and validate the asset.  After the NFT is listed, you must promote it on the marketplace or other platforms, including your website.

selling your art as a creator

Many NFTs are sold by their creators to generate profit and garner attention.  The creator or owner remains with the copyright of the NFT (more on that later), however, buyers purchase property in the NFT, meaning they have proof of the digital ownership of the asset but the creator retains copyright.  This is like music, while you buy the rights to listen to the song, you cannot (or should not) reproduce it for public use because the copyright belongs to its creator.  By selling your own work, interested buyers purchase your work’s property rights and you can either reinvest the profit in other crypto or exchange the profit and transfer it to your bank account.  You can list your NFT to generate additional gains if you set to collect royalties if buyers sell or trade your work.

nft tradings 

Another way to generate profit with NFTs is to buy a sell other creators’ assets.  Similar to buying physical collectibles, you buy a stake in investment and retain it until the demand is higher than your original purchase price and sell it.  You don’t have to mint the NFT because the owner already did this, but you will pay additional gas fees to relist the asset.

a checklist of things to consider when raising capital using nfts 

    1. Understand NFTs Before Jumping on the Bandwagon – It is crucial to understand the nuances of the business and a good practice is to visit sites like Coindesk.com or CoinMarketCap to understand blockchain, cryptocurrencies, and NFTs.  You can also watch YouTube videos or other online sources, but you must use your better judgment to ensure source legitimacy.
    2. Choosing the Correct Marketplace – There are a variety of marketplace platforms used to sell NFTs.  OpenSea is the largest NFT marketplace, but others have pros and cons.  There are marketplaces specifically for Sports NFT trading, others for digital art, some for music.  Some use specific tokens or coins, while others accept various forms of payment.  OpenSea and Rarible seem to be the best for beginners.  However, inform yourself of the pros and cons of each marketplace before listing your NFTs.
    3. Minting, Wallets, and Other Tools You Need Before Selling – Minting refers to the process of coding the NFT onto the Ethereum blockchain.  Ethereum is a decentralized, open-source blockchain that functions on smart contracts.  Ethereum has its cryptocurrency known as ETH, and before you can sell an NFT, you need to open a crypto-wallet and exchange fiat currency into ETH crypto to pay for the gas fees.  There are various wallets to choose from, and it’s best to research the appropriate wallets for your interests.  You will also need to use a wallet or app to convert crypto to fiat money.  Some wallets, like Coinbase Wallet, let you convert if they support your type of crypto.
    4. Fees – Every event or transaction involves a fee, and whether it’s listing your NFT, using a marketplace, opening a wallet, exchanging between fiat currency and crypto, every event has a transaction fee attached to it.  However, some platforms charge more than others, and gas fees vary because of many factors such as time of day, transaction amount, and more.  Research the various platforms and wallets to find out how their fees work.
    5. Legal Considerations Based on How You Sell NFTs –

If you own your NFT, register your work with the U.S. Copyright Office or the copyright office in your jurisdiction.  While this won’t necessarily prevent copyright infringement, you have the right to sue the parties involved.  If you’re trading NFTs, make sure you avoid liability by selling property you have rights to.

If you plan on selling fractions of your NFT, you might have to register with the Securities Exchange Commission “SEC”.  While NFT regulation is still unclear, the SEC has used the Howey Test—SEC v. W.J. Howey Co. —to determine whether fractionalized crypto shares can be considered an investment contract and, therefore, a security.  Blockchain assets usually run-on Smart Contracts, considered the same as a contract under the SEC.

Taxation is something to keep in mind.  While the IRS also struggles with crypto regulation, it classifies crypto assets as property, and you need to report your assets as such.  Additionally, it is crucial to record all transactions because every transaction is likely a taxable event.

It is essential to seek legal counsel if you want to use NFTs to generate income for business ventures because an experienced attorney can explain and likely provide solutions for a variety of legal issues.

This post has been reproduced with the author’s permission. It was originally authored on February 7, 2022 and can be found here.

Jeremy Garcia, at the time of this post, is a third-year law student at Penn State Dickinson Law interested in practicing in Capital Markets and Acquisitions after law school. Born in the Dominican Republic and raised in New York City, Jeremy received a Bachelor of Arts and a Master of Public Administration from John Jay College of Criminal Justice. Jeremy worked in government in the Telecommunications and Data Privacy field before law school. Jeremy enjoys volunteering with organizations that help underrepresented communities and is the current Chair for the National Latina/o Law Students Association.

Sources:

Jacob Hale, The 10 Most Expensive NFTs Ever Sold, Dexerto.com (Dec. 18, 2021). https://www.dexerto.com/tech/top-10-most-expensive-nfts-ever-sold-1670505/

Coinbase Basics, What is a non-fungible token (NFT)?, Coinbase.com, https://www.coinbase.com/learn/crypto-basics/what-are-nfts

Nicholas Rossollilo, How to Sell Non-fungible Tokens “NFTs”, The Motley Fool (Dec. 11, 2021). https://www.fool.com/investing/stock-market/market-sectors/financials/non-fungible-tokens/how-to-sell-nfts/

Will Gottsegen, Policy, Some NFTs Are Probably Illegal. Does the SEC Care?, (Oct. 20, 2021). https://www.coindesk.com/policy/2021/10/20/some-nfts-are-probably-illegal-does-the-sec-care/

U.S. Securities Exchange Commission, Framework for “Investment Contract” Analysis of Digital Assets, https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets

Internal Revenu Services, Small Business & Self-Employed: Virtual Currencies, https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies

Author: Prof Prince

Professor Samantha Prince is an Associate Professor of Lawyering Skills and Entrepreneurship at Penn State Dickinson Law. She has a Master of Laws in Taxation from Georgetown University Law Center, and was a partner in a regional law firm where she handled transactional matters that ranged from an initial public offering to regular representation of a publicly-traded company. Most of her clients were small to medium sized businesses and entrepreneurs, including start-ups. An expert in entrepreneurship law, she established the Penn State Dickinson Law entrepreneurship program, is an advisor for the Entrepreneurship Law Certificate that is available to students, and is the founder and moderator of the Inside Entrepreneurship Law blog.