As a young rapper, Jay-Z once teamed up with Damon Dash to sell CDs of his music from a drive-through at Brooklyn projects. Today, the co-founders of Roc-A-Fella Records are embroiled in a legal fight involving one of the most cutting-edge investments: non-fungible tokens.

The lawsuit is among a flurry of NFTs as US courts begin to grapple with new legal issues related to the ownership and regulation of assets, the value of which has increased recently. More than half a dozen lawsuits citing NFTs have been filed in federal courts alone since early 2020, as monthly trading volume on the world’s largest NFT marketplace, OpenSea, skyrocketed from $8 million six months ago. to over $1 billion in August.

The dispute began in June, when Roc-A-Fella sued Dash, trying to stop him from auctioning off the copyright to Jay-Z’s debut album, Reasonable Doubt, as an NFT, which stands for ownership of a digital object on a chain. of blocks. Roc-A-Fella says that while Dash has a one-third stake in the company, he owns the album and has no legal right to sell the NFT.

Jay-Z’s lawsuit should serve as a warning to NFT buyers and sellers to make sure both parties know exactly what is being sold, said Christopher A. Cole, a partner at Crowell & Moring LLP in Washington.

“They have to be very careful early on, when the NFT is created, to make sure that it is a valid instrument and that the creators have the rights they need to what is being sold, so that it doesn’t get attacked in the future,” Cole said. .

There is likely to be more litigation involving NFTs, from lawsuits on behalf of consumers who did not understand the nature of the rights they were acquiring to government actions to protect them, said Pratin Vallabhaneni, a partner at White & Case in Washington.

“There are all kinds of misunderstandings that consumers have,” Vallabhaneni said. “If the disclosures about the product were strong enough and if the terms were clear enough, these are the kinds of consumer protection questions that can serve as the basis for lawsuits.”

Dash is only trying to allocate the rights to future royalties to which he is entitled as the one-third owner of Roc-A-Fella, as artists have long done, his lawyer Natraj Bhushan said.

“Roc-A-Fella doesn’t understand what is coined and he doesn’t care what is coined,” Bhushan said. “I don’t think they understand what we’re trying to do.”

Alex Spiro, an attorney for Roc-A-Fella and Jay-Z, declined to comment on the dispute.

Some of the cases could help shape how the industry develops, as the laws surrounding NFTs are unclear and authorities have not provided specific guidance on how tokens will be regulated, said Gary DeWaal, financial markets and regulation attorney in New York and former trial attorney for the US Commodity Futures Trading Commission.

“There is no regulatory guidance that is meaningful, so if something comes up in private litigation, that can have an unintended consequence of affecting future development in this space,” DeWaal said. “But there is nothing unique about NFTs. This entire industry, the entire crypto space, suffers from a dearth of clear regulation, and as a result, people are left alone to figure it out as best they can.”

One question that stands out is whether NFTs are securities and therefore subject to regulation by the US Securities and Exchange Commission. Some industry participants are essentially begging for a lead.

In April, stockbroker Arkonis Capital LLC, a subsidiary of Sustainable Holdings Inc., sent a petition to the agency asking it to clarify how NFTs will be handled, saying they have “tremendous potential to revolutionize industries” but “don’t work.” as traditional values ​​and do not clearly fit into the existing regulatory framework”.

Hot Case

In a potentially influential case, Dapper Labs, an industry pioneer that created the popular platform Cryptokitties, has been sued by a client who alleged that its NBA Top Shot game features unregistered values ​​and accused it of using its control over collectibles to prevent that investors withdraw their funds.

That lawsuit, in which the client seeks to represent a class of others, was a “cross shot” for NFT developers and platforms that facilitate token sales, and likely led some potential issuers to scrap their plans, he said. Courtney. Rogers Perrin, an attorney with Frost Brown Todd LLC in Nashville.

“I think it’s definitely a developing area, and just like we saw” with initial coin offerings several years ago, “regulators are still trying to figure out exactly what this is and how it fits into the current regulatory paradigm,” he said. Rogers Perrin. . “In the meantime, there are some lawyers for the plaintiffs or people who feel it should sit a certain way and are filing lawsuits.”

Dapper Labs has not responded to the lawsuit. Legal director Scott Shipman said the company does not comment on active litigation.

99 Problems

The animosity between Dash and Jay-Z that has built up over years of bickering over Roc-A-Fella’s management is evident in their latest showdown.

Dash says he never claimed to be selling his stake in Reasonable Doubt and never coined an NFT that reflected an ownership stake in the album or his share of the record company. He says the entire suit is part of a campaign by Jay-Z to prevent him from selling his stake in Roc-A-Fella so he can acquire it for a lower price. Dash alleges that Jay-Z has created a “toxic environment” that has made it difficult for him to sell his stake in the company.

Roc-a-Fella, in turn, accused Dash of launching an “angry, unprofessional and incoherent tirade” at a board meeting, while also singling out his lack of income as a reason for selling the rights to the album.

Dash was initially prevented from selling the rights to the album, and later agreed not to transfer an interest in the recording until the lawsuit is settled. In July, an auction began with an initial bid of $10 million for his part of Roc-A-Fella. The winner will receive a commemorative NFT, “It’s the Roc”, which represents a certificate of ownership.

Jay-Z sold his own NFT to celebrate the 25th anniversary of his debut album through Sotheby’s for $138,600.