This is Bloomberg Law with June Brusso from Bloomberg Radio. The frenzy over n f T s or non fungible tokens is a little hard to wrap your head around.
From digital art to sports memorabilia to tweets, everyone seems to be getting into the craze, and the sales prices are staggering, from nearly six hundred thousand dollars for the n f T of Nion Cat, a cat with a pop tart body that leaves a trail of rainbows, to two point nine million dollars for an n f T of Twitter founder Jack Dorsey's first tweet, to a record sixty nine million dollars for the n f T of a digital art collage by the artist People sold at
Christie's auction house in March. Even the artist, whose real name is Mike Winkleman, seemed overwhelmed by the final price as he and his family watched the auction from his living room. We're watching that closing of the auction, which closes in an hour and eight minutes. It's already at like an absolutely ridiculous amount to say congratulations, Yet I think it probably means digital art is here. To stay. I'm going to Disney World. So what is an n
f T and why are they so hot? Joining me is Robert him a partner at Tartar, Crinsky and Drogan who recently wrote an article on n f T s and securities law and turned it into an n f T. So, Bob tell us what an n f T is. An n f T is a non fungible token, and it's a new development that's been occurring in the markets. And unlike say a cryptocurrency like bitcoin, which is fungible in the way dollar bills are in the sense that you
don't care what sort of dollar bill you get. They're all pretty much the same and they do the same thing. And n f T is a unique token, so people do care about the specific token that they're getting because each one is on the blockchain and each one individually carries a certain amount of right with it, whether it's to digital art or to music or two other things. And it's really a way that's starting to revolutionize a lot of the creative industries. N f T seemed to
be really popular for artistic endeavors. N f t s have been the most popular with respect to artistic endeavors. In March, there was an auction at Christie's where an artist named People had sold a digital art collection for sixty nine million dollars and that's really raised a lot of interest. And the n f T market for art had been growing before that, but with that blockbuster sale
it really came into the mainstream. There's other companies, especially the NBA, they've been at the forefront in terms of creating n f T s for essentially collectibles and almost like the digital version of sports collectible cards. And as we look to the future, there's a lot of exciting possibilities in the in the physical world, like an ownership of real property that can be documented on the blockchain. There's a lot of new opportunities that are out there.
But currently it seems like the creative industries are really um in the throws of the new n FT craze and benefiting a lot from it. So just to get really down to basics, if you buy an n f T, what do you get a digital file? Do you get a thumb drive? What do you get in your hand or on your computer? Well, that's a great question, June, because h n f T has its own set of rights with it, and really right now, it's a buyer beware market, so buyers really have to dig deep and
understand what they're getting. But at the heart of it, a person gets essentially a piece of code, and they're mostly being done on the Ethereum blockchain, but there's some other blockchains that are doing it as well. But you don't get any sort of physical device like a USB drive. You have to have a digital wallet which accepts Ethereum or whatever cryptocurrency you you get, and it appears essentially in your wallet, on your browser, on your cell phone,
and it's an n f T that's unique. It's on the blockchain, and it's a way of authenticating the person that purchase a n f T is really the true owner of that piece of digital artwork or work that was created. The n f T that was sold at Christie's for the digital art. So you own the n f T. Do you own the digital art? Can you say if someone tries to show that digital art on a computer somewhere, can you say that's mine? You can't
use that. It really comes down to the rights that the creator the artist gives to the token purchaser um and and each token can carry different rights. Um, A lot of the digital art tokens that are being created come with licenses for the person to be able to essentially use it for personal use. Other n f t s come with rights to commercialize the digital artwork and to to generate royalties. And that's really one of the nice thing about n f f p s is that they
really allow for a lot of customization. Uh, some artists are even including residual clauses in their tokens, so that if they sell the first one, say for a thousand dollars, and in that person resells it for ten thousand, the artists might get ten percent as a residual royalty from the subsequent sales of the token, and they the rights can really be tailored to however the artist wants to give to the to the purchaser. So is it governed
by the securities laws? Whether the securities laws apply is going to be a developing question. I recently wrote an article that ties into whether n f t s are covered by securities laws, and I actually turned that article into an n f T and I sold it on a digital platform. So somebody out there purchased my n f T of the first legal articles as far as I know, but a lot of the securities law questions are going to be tied into how the token is marketed.
If it's marketed it as an investment as a way for people to make money, as something where they're going to be relying on the efforts of other people in order to earn a profit, then it's very likely that an n f T could come under the regulations of securities.
But if it's being marketed it is more of a digital collectible as a way to authenticate the ownership, as a way to authenticate that it's a legitimate, authorized piece of digital art, then in that situation, it's a lot less likely to become a security So it's really going to be a new developing areas we apply these principles that have been around for over a hundred years with the securities laws to these new emerging technologies in the
digital space. So let's say that three people get together to create an n f T for profit based on art. Is that an investment contract that might be subject to securities laws? It certainly can be if the people create an n f T that's focused on digital art, But when they go out to sell that n f T and they promote it in such a way the person can get rich or they could make a significant profit by buying this n f T, And it's really a decision that's being driven by an investment desire and a
profit making desire. Under an old Supreme Court test called the Howie test, that contract that n f T could be considered an investment contract and therefore security. These days, most people are trying to stay away from that. So we are seeing a lot of marketing being done by artists that are really emphasizing the art and the collectibility of the art and the significance of the art, versus a way of trying to entice people to invest based
on a desire to turn a quick profit. Now a lot of people are purchasing these n f T s with the desire to perhaps make money, but that in it itself will not be enough to make it a security. It's really going to depend on the whole picture about how the tokens are being marketed to people. Do you know of any n f T s that have been registered as a security I'm not aware of any n f T s that have yet to be registered it
as a security. UM I do know that recently there is an investment fund that is in the process of being started that it looks like it's going to be listed on the London UH Stock Exchange UM. So definitely there's some more established players that are coming into the n f T market to UM to invest in it, but as of yet, I don't believe in any n
f t s have been registered as securities. And the nice thing about n f T s, as we kind of compare it to the boom and initial coin offerings UH several years ago, is that while initial coin offerings had a lot of the traditional indications that they would be securities. In other words, people were using UM initial coin offerings to raise money for new businesses and they were going to be deploying the capital to develop concept. Those things were almost, you know, very similar to typical
startups issuing stock. Here with n f T s, I think there's much more of a real world application in terms of people UM, you know, purchasing these items, not so much to invest in the business because these these digital artworks are already created, So people aren't funding new ideas, they're they're purchasing digital art They're purchasing certificates of authenticity.
So I think the whole impetus in a lot of ways for n f t s has a much more real world focus and much much not more natural affinity for collectibles and for art than they would for for securities laws and investment purposes. Let's say it was determined that one of these n f t s was an investment contract. What kinds of procedures do you have to go through if if it's considered a security. Well, if it's a security, there's a couple of problems that are
going to come up. You know, one of the creator sells an n f T and it's subsequently determined to be a security, that person is going to be subject to sanctions in terms of having to potentially disgorge any money that they received, having to pay civil penalties to the sec having an injunction entered against the person um
and that's going to be quite quite problematic. But if a person was to um create an n f T that that was designed to be a security and to come under the securities laws, then the traditional ways of marketing and security would come into effect. If the person wants to sell it to the general public, they'll have to register that n f T with the Securities and Exchange Commission on a registration statement with the perspectives that outlines the business purpose of the n FT outlines the
risk factors. But probably if people are going to create n f t s that their first um their first approaches are more likely to be private placement, which are also regulated by the SEC under something called Regulation D. And these are investment opportunities that are open to accredited investors and they generally can't be marketed to the general public UM with certain exceptions. So it's a it's a it's a much more established market and in in a
regulatory that people will become familiar with. So if you create an n f T and decide to sell it, what do you have to think about legally? Well, right now it's it's an open question. But if you're just a regular person that's participating in some of these online marketplaces, there's there's quite a few that have gotten to be very popular. There's different marketplaces called Mintable and Wearable and
top Shop as the NBA shop. UM as a as a person just buying an n f T for their own use or maybe looking to resell it down the road. You really don't have much in the way to to worry about with regards to securities regulations. It really only becomes an issue if, um if you're go out and you're promoting it and you're issuing perhaps press releases or another area that's been a great concern to the SEC
or social media influencers. There's been a number of celebrities that have been charged by the SEC for accepting undisclosed payments for cryptocur in seas and touting those cryptocurrencies on their social media accounts. Floyd Mayweather, the famous boxer, was one of the one of the people that settled with
the SEC about that. Um. So, but as long as you're not accepting payments for that aren't being disclosed, and you're just kind of personally purchasing and selling n f T s, there's really not a lot of risk to that process. So, but can you walk us through how
you made an n f T of your article? Yeah, what I did is I used one of the popular sites called Mintable, So I took the b d F of the article that I wrote, I used the Mintable site to create an n f T from it, and then I listed it for sale on the mintable site, and to my surprise, about five hours after I created it, there was a crypto investor an entrepreneur that had purchased the n f T. But it was really a pretty straightforward process. I had a basic understanding of ethereum and
had a wallet already. Once you have the basic covered, it's not a very difficult process. And a lot of people that are every day artists that aren't necessarily tech people are finding it manageable to create their own n f t s. And so how much did you get? I did it more just as a learning experience, So I saw this for the grand price of five dollars um. But you know, in the future, as I think about it, maybe I'll create another n f T or something else
in the legal space. But it was really a great learning experience and some a securities lawyer that's worked a lot in the crypto space. Part of the reason I did it was to better understand my clients who who are also starting to operate with n f t s and creating them. Thanks Bob, that's Robert him of tartar Kinsky and Drogan. The Netflix documentary series on the college admission scandal entitled Operation Varsity Blues the College Admission Scandal,
became available for streaming on Mark seventeen. The movie, starring actor Matthew Modine as Rick Singer, the admitted mastermind of the college admission scheme, presents re enactments of conversations drawn from FBI tapes in addition to the usual interviews of documentary fair We helped the wealthiest families in the US get their kids into school. So I've done seven sixty one what I would call side doors. The front door means getting in on your own. So I've created this
kind of side door. And because my families, I want to guarantee A private equity and real estate executive accused of paying bribes to get his children into Harvard, Stanford and USC as recruited athletes is suing Netflix for defamation. John B. Wilson has pleaded not guilty and is awaiting trial on charges including money laundering, conspiracy, federal programs, bribery, and filing a false tax return. Joining me is Bloomberg Legal reporter Patricia Hurtado tell us a little bit about
the series and the complaint. Well, their Netflix did a series based on the investigation in the case called Operate and Varsity Blurs, and it's based on the events of the case and allegations including you know that Lori Laughlin and her husband Um allegations that they got their daughters to pose on a rowing machine and pretend that they were real athletes so they could get into like usd UM. This dad is a private equity UM executive and he lives in Lynnfield and he is finding the charges the
next six series. It's a documentary that is a re enactment of the investigation. So what they've done is they've hired actors and actresses to read the transcripts of the wire taps and the conversations of the government quotes and the criminal complaints and indictments against the parents, and then they have actors and actresses re enact SBI agents listening to the call. So it's a documentary, but not in the typical ken Burns type of documentary that you're thinking
of with real people. UM. This is of a recent case that's still pending. So there are at least a half dozen parents that are still fighting the charges of the more than thirty parents that were charged in the case. And so the parents that are still fighting. The charges include this dab John Wilson from Lynnfield, Massachusetts. He has three kids, and he was accused of conspiring to get with the with singer to pay bribes to get his
children into USC, Stanford and Harvard. So Wilson says he's innocent, but the film groups him in with the parents who pleaded guilty, and he claims they contacted the producers before the series aired. What happened is, according to uh the lawyer for John Wilson, is that they met with the Netflix producers before the series was completed. The documentary was completed,
and they lawyer gave them evidence. The producer's evidence of what he said is will clear him of wrongdoing, evidence of his actual innocence, including that the dad, John Wilson, took a a lie detector test and passed with flying colors,
according to lawyer Howard Cooper. He also says that they have evidence of the kids F A T and a C T score test scores um the grade of the three kids that they narrited applying to these schools, and one of the key examples is that there is um the allegation that his son may have had this picture doctor to a fake athlete as a water polo athlete.
When John Wilson's lawyer says, they actually have proof that his son, Johnny was a star high school water polo player who is now at USC on the USC water polo team and he's never been taken off so that he narrated it. There also is um. The father's says there's proof that all three of his kids tested in the ninetieth percentile as their college exams, including one daughter who got a perfect score on her a c T test.
So they presented all this evidence to the Netflix producers, according to Howard Cooper, who's John Wilson's lawyer, and Netflix went ahead and put him in the same hopper with the parents who pled guilty, and they talked about doctored photos and photoshop pictures of kids that are fake athletes. So now John Wilson says he's technically gonna stand trial in September. You have all these people sitting at home
watching Netflix because they're the global pandemic. They can't go to the movie, so they're live streaming their hearts out at home on their sofas. And John Wilson says, the whole potential jury pool who could hear his case in September has now been painted. That evidence sounds pretty strong. But before trial, they would have tried to approach the prosecution right and present that evidence. But the prosecution is
still going forward. So what does that tell us? Well, it tells us I mean there is a fine line if you think about it. You know, everyone has presumed innocent until convicted, right until either plead you plead guilty or convicted a trial. So it sounds to me almost like the producers and Netflix didn't make that distinction in their depictions of the parents and um. John Wilson's lawyer told me that he the family friends of his client have called him up and said, hey, I didn't know
you did this. I thought you did what you know x or y, and and it completely blurs the line between those who have admitted their guilt versus those who didn't. So I mean, technically, you know, we as we journalists, we would write and say the person has denied wrongdeering and it's fighting the charges, and here's what they're defense lawyers say. But that's kind of omitted from these re enactments,
according to the lawyer complaining about the documentary. So they sued them for defamation, and the producers saying they're basically put in the same bucket with all the parents who pled guilty, you know, the likes of A. Lori Laughlin and her husband or in Felicity Huffman. They've admitted their guilt. They said they did these crimes. They plead guilty, and that's the truth as far as the courts are concerned. But somebody who has pled not guilty has a right
to say, wait a minute. The court of public opinion may say something, but you know, technically you're fighting the charges, and if you want to be accurate, you know, you might need to remember that even in a in a documentary depiction. So Wilson says he's not guilty, but did he have any contact at all with Singer, who masterminded the admission scandal. He argues that he did have contact
with Singer, but nothing was improper. He said he was introduced to Singer after a major financial advisory firm referred him to him, so that he was called a highly reputable college admissions counselor so, and that they were legitimate donations that were made, not bribes paid with the way the government argues this. Have the producers or Netflix responded to why they put Wilson in with the people who
pleaded guilty. Uh, now, they would not give us any comments, so I guess we'll remain to see what their responses are in court. Um, they filed a lawsuit, and I understand from my colleague in Boston the lawyer for John Wilson, his name is Howard Cooper, and he's been successful as one of the top defamation lawyers in the Boston area. So this child will be pending in state court in Boston. You know, we've seen all the movie stars, the famous
people going to prison, coming out of prison. It's surprising to me that the case is still going on. Oh, you know, with the government charged a whole slew of people. I mean, I think the universe of people. I think we're up into the fifties now. Um, many of them
have pled guilty. And there's certainly, you know, a whole cast of characters and parents, coaches, school consultants, testing consultants as well as um, you know, the parents that have been implicated in this case, and many of them have pled guilty. I think the scorecard is I think we have over thirty parents that have pled guilty. Um, and certainly some coaches. There was a Stanford sailing coach, a
Georgetown tennis coach. They all they played guilty. So the universe of people that the documentary filmmakers could have used, you know, there's plenty, it's plenty of material. I guess this dad is saying, I'm not in that universe of people,
so you should have made more of a distinction. And you know, especially he's got a well known libel and defamation lawyer who's met in advance of the documentary being broadcast and completed, and he said that, you know, he put a dossier of information and they went ahead and he says, defamed him. And what about the parents who
pleaded guilty and went to prison. Um, some of the parents have gone in and they went into One of the interesting things about this is they went in right at the beginning of the pandemic, and some of them got out because of humanitarian reasons that you know, the risk of COVID, because of their health issues and they were, you know, with co morbidity, so they were able to
get out. But some of the parents who went in later after pleading guilty, they ended up finding themselves in a jam because they asked to get released from prison, and basically the judge said, you should have thought about this before you agree to go into prison. So I can't let you out now because there's just as much
COVID out of prison as in prison. So some of the parents that have played guilty and some of the other participants in the case that have played guilty, they have now postponed their sentencing until things calmed down at COVID before they go in. Thanks for being on the show, pat That's Patricia Hurtado, Bloomberg Legal reporter. And that's it for this edition of The Bloomberg Law Show. I'm June Grasso.
Thanks so much for listening. Please tune into The Bloomberg Law Show every night at TAMPM Eastern right here on Bloomberg Radio.