In the past when one bought an NFT, the only expectation was that he or she was buying rights to an asset (usually a piece of digital art).
These days, however, NFT projects offer holders of their NFTs (“Holders”) membership in a community and various real-world benefits. Some NFT projects have gone so far as to offer physical space to Holders and market themselves as social clubs with curated membership. In other projects, groups of Owners have come together to form committees to organize events for other Owners.
As NFT projects move further in this direction, there is a need for the founders of these projects (the “Founders”) to consider legal requirements related to society and the implementation of a set of terms governing the relationship between themselves and their Owners to protect against legal risk, and to provide security to its holders.
As a founder, why should I bother implementing a set of terms?
Where an NFT project involves only the sale of digital art in the form of an NFT, full terms and conditions are arguably less critical to adopt than if you offer services as part of the sale of the NFT. In the latter, the parties now engage each other for the provision of services over a longer period of time, and it is important that each party’s rights and obligations are clearly stated at the outset.
A clear set of terms and conditions can provide legal certainty in relation to the following (just to name a few):
- The aim of the community;
- Founder’s rights to change or remove benefits;
- The founder’s rights make decisions on behalf of the community;
- Whether there may be election of a committee of holders;
- When a holder is considered qualified to enjoy the physical space or utility;
- The different classes of holders and their respective rights and benefits;
- General rules relating to the use of the physical space, the Discord channel or other community spaces;
- Limitations of Liability;
- Dispute Resolution Procedure; and
- Right to dissolution of the community.
Some of these terms reflect those found in a constitution and rules and regulations for a regular club, but the nature of NFT project-driven communities requires consideration of various scenarios that a regular club will not face.
For example, take a situation where there are pre-approved holders who have been issued “soul bound” NFTs (ie wallet-specific and non-transferable NFTs) and founders intend that only pre-approved holders will benefit physical space or other advantages and benefits. Without a proper set of terms, the Founder may have trouble claiming that someone who was not pre-approved but owns the “soul-bound” NFT by obtaining the wallet of someone who was pre-approved, is not entitled to the benefits of any other Holder.
Another consideration relates to the international reach of NFTs. There is a trend for holders in a specific country to band together to organize events and benefit the other holders in the jurisdiction. As a founder, you may want to set guidelines and limits on your owners’ abilities to do this to prevent dilution of your brand.
I have stated some of these rules on my website, my Discord channel community rules, and in my marketing materials. Isn’t that enough?
In short, no. Variations in the wording used on your website, tweets and Discord posts can affect your case in the event of a dispute. Additionally, a holder who purchased your NFT from a third-party marketplace such as Opensea may claim not to be bound by the wording on your website as he or she has not seen or consented to them.
If well implemented, a simple set of terms will enable you to avoid disputes over whether a statement is actually binding and prevent claims of misrepresentation. Steps must be taken to ensure that the holders accepted the terms before they are offered the community benefits. This is a process well established in Web2 that should not be abandoned by the Web3 community.
Is there anything else I, as an NFT founder, have to think about when creating a community with physical club premises?
Authority approvals may be required for the establishment of physical club premises. In Singapore, an NFT society may have to register as a society under the Societies Act if it begins to take on the characteristics of a club. Depending on the services you intend to provide on the premises, other regulatory approvals may be required.
