Beware of Fraudulent NFT and Token Sales

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Unfortunately, misrepresentation and outright fraud are rampant in the blockchain world, especially with coin and other fungible token offerings and NFT sales.  The old adage ‘buyer beware’ certainly applies.  But just because this new and emerging market is high-risk, does not mean you don’t have rights if the founders of a blockchain company, token sale, or NFT sale knowingly or unknowingly provide false information as part of their sale. Traditional legal principles apply, including breach of contract, innocent misrepresentation, fraud, and negligence. If the offering is a security as defined by the SEC, you may have additional legal rights and leverage. While your primary weapon against fraud is due diligence before you purchase a token or NFT, you may need a lawyer to help you if you are a victim of false presentations or other breaches of duty by the companies and people behind these offerings.



Don’t Get Sued for Breach of Contract, Breach of Fiduciary Duty, Fraud, Misrepresentation, Consumer Fraud, Securities Violations, or Other Causes of Action.

There are an endless set of legal issues related to token offerings, ICOs, and NFT sales. Blockchain, NFT, and crypto litigation attorneys are going to be very busy in the coming years.  Getting sued will become more common when things go wrong.    If you are worried about legal compliance with your blockchain offering or have questions about a token or NFT you purchased, you should probably speak with a blockchain lawyer with experience in complex litigation to reduce your risk of getting hit with a lawsuit.   Below is a list of lawsuits filed in the crypto and NFT space (we will update regularly):

  • Bored Apes v OpenSea:  The lawsuit was filed by the owner of Bored Ape against OpenSea (which is only a d/b/a)  for breach of contract, breach of fiduciary duty, and negligence. The lawsuit appears to have been a bit rushed as it failed to name a defendant the actual owner of OpenSea Ozone Networks, Inc.  Regardless, the plaintiff owner of bored Ape #3474 Timothy McKimmy alleges that OpenSea left vulnerabilities in its platform – a software bug – that left NFT owners subject to attack. Plaintiff lost his Bored Ape for .01 ETH even though it was not for sale and that price is below market value.  Plaintiff seeks damages against OpenSea for over $1,000,000 of the, no doubt, permanent loss of his Bored Ape. Southern District of Texas The Federal Court Complaint is found here. OpenSea’s Terms of Service, including a mandatory arbitration clause, disclaimers, and damage limitations are found here.
  • Trademark & Copyright Infringement: Brands and companies have begun to file lawsuits against NFT projects that violate copyright, IPs, and trademarks. Nike filed a lawsuit against StockX for trademark infringement on Nike sneaker NFTs. Even French luxury fashion house Hermes sued Mason Rothschild, creator of Hermes Birkin bag-inspired NFTs MetaBirkins. There are dozens of artists preparing lawsuits against OpenSea for selling infringing NFTs. The application of the Digital Millennium Copyright Act (DMCA) to platforms hosting NFT sales remains an open issue.
  • Scams & Fraud: Google searches for “NFT scam” and “NFT fraud” continue to rise, indicating the scope of the problem. With droves of people buying in — some far more tech-savvy than others — Rolling Stone asked experts for tips on how to avoid expensive blunders.
    • Discord hacks are one of the most common NFT scams out there. TIP: turn off the direct-messaging function on Discord
    • Phishing in Twitter messages and emails is rampant. Hackers pretend to be representatives from OpenSea, the Internet’s largest NFT marketplace, and Metamask, a popular NFT-storing digital wallet.
    • Fraudulent Airdrops are attempts to get you to click on a link (the token contract address) that includes malicious software.  This is akin to a phishing scam. If you receive a free token offer or someone sends an unknown token to your wallet, ignore it.
    • Rugpulls are a form of fraud where influencers with large followings on YouTube, Twitter, or other social media channels tell you that a token or NFT is going to be huge.  They influence their followers to purchase the token or NFT driving the price up.  Then they sell their large percentage stake, driving the price to zero before you can cash out.
  • Common NFT Scams – NFTs are the hottest crypto market right now. Because there is a digital asset attached to the NFT token contract, it ‘feels’ like you are purchasing something ‘more.’ However, counterfeit NFTs of high-value projects are rampant. Few NFT offerings trademark their NFT, or enforce their copyright to the images, making it easy for a scammer to defraud NFT purchasers by offering similar NFTs and low prices when the fake NFT is really worthless. Until NFT projects start aggressively protecting their trademarks and copyrights, and platforms such as OpenSea and Rarible take infringement and fraud seriously, there will always be a risk with NFT purchases. Your best defense is to go slow and do your due diligence before purchasing anything.
  • Counterfeiting: The biggest NFT marketplace, OpenSea reports that over 80% of the NFTs minted for free on its platform are “plagiarized works, fake collections, and spam“.
  • Influencer Fraud – Influencers in the crypto and NFT space are paid to endorse a stolen or NFT project.  Sometimes they either intentionally or innocently misrepresent the project resulting in serious losses through rug pulls and other scams.  Beware celebrities who endorse projects for money.  Do your homework and dig into the project whitepaper and research the project founders before getting involved.
  • DigiArt v.  Danny Casale – Civil complaint lawsuit filed in the United States District Court of the Middle District of Florida (Tampa).  Casale has handsomely profited from his breach of contract. According to press releases, Casale’s “Coolman’s Universe” collection sold for $3.6 million in 3 minutes on metalink. That same collection of offending NFTs has now generated a secondary trading volume of over 18,000 Ethereum, or over $50 million on OpenSea, with a 5.6% royalty to Casale on all secondary trading, which converts to over $3 million in royalties for secondary trading alone. On information and belief, Casale has personally received millions of dollars from first-market sales of the offending NFTs, 50% of which were required to be paid to DigiART.
  • Roc-a-Fella Records sued its co-founder Dame Dash over his alleged attempt to mint and sell Jay-Z’s Reasonable Doubt album as a non-fungible token (NFT). See the United States District Court complaint.
  • Hermes filed a lawsuit against a digital artist for knocking off its Birkin handbag who started a project called MetaBirkins.  This NFT lawsuit is filed in UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK.   The MetaBirkins project offered non-fungible tokens (“NFT”) which included fuzzy images of the Hermes Birkin handbag and minted them as NFTs. Hermes based its allegations of trademark infringement and dilution on the artist’s use of MetaBirkin as a trademark to promote his NFTs and at his metabirkin.com website.

FREQUENTLY ASKED QUESTIONS ABOUT NFT LAWSUITS

NFT, crypto, and blockchain technology is still new.  Adoption is still in its infancy.  Most new emerging technologies are given a grace period before lawsuits start to scale up. We have seen an uptick in litigation being filed in the fungible token and nonfungible token space. Despite problems of fraud, rug poles, project misrepresentations, missed deadlines, possible securities violations, selling NFT without the proper copyright ownership, selling counterfeit NFTs, failing to provide project deliverables, misrepresentations to investors, and many other issues, litigation has been slow to be filed. As adoption continues to grow, the tolerance for breach of contract, fraud, misrepresentation, scams, and breaches of fiduciary duty is rapidly declining. Investors in NFT projects, token purchasers, and government agencies are all scaling up on litigation. This trend is expected to continue as the market matures. Protecting your crypto, Blockchain, and NFP project against legal risks has become far more important.

Litigation reduction needs to start early, and hopefully before the crypto or NFT project launch. There are near endless ways lawyers can reduce the risk of getting sued.  Lawsuits are expensive, distracting, and can bring an end to your crypto project. The ROI on getting expertise and good legal advice is a certainty.  Here are some examples of risk reduction strategies to avoid having to hire a litigation attorney after the fact:

  • Independent contract agreements.
  • Founder, owner, partner and executive IP ownership and non-compete agreements.
  • Non-disclosure agreements.
  • Trademark registration.
  • Copyright registration
  • IP monitoring and protection.
  • Linked digital asset contract drafting.
  • Website agreement drafting.
  • Commercial contract drafting.
  • Website and project roadmap and website marketing language review.

An initial coin offering (ICO) is an event where a company sells a new cryptocurrency to raise money. Investors receive cryptocurrency in exchange for their financial contributions.  The primary difference between ICOs and IPOs is that IPOs involve selling highly regulated securities overseen by the Securities and Exchange Commission (SEC).  There are significant disclosure requirements and investors must be qualified, typically having assets worth more than $1,000,000. ICO’s are currently not regulated by the SEC, although regulations are likely coming for coin offerings that are considered securities.  Many crypto companies identify their tokens as ‘utility’ tokens in order to avoid regulatory oversight.  Our attorneys expect a growing number of lawsuits and litigation around ICOs.

The Attorneys at Traverse Legal has been globally recognized for their experience and results. We can provide legal expertise for a variety of industries and practices areas such as blockchain, cryptocurrency, NFTs, and smart contracts.  We handle IP and technology litigation for plaintiffs and defendants involving crypto, blockchain, and NFT issues. Contact our team today!

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