The tokenization of assets has revolutionized blockchain applications, enabling innovative methods for raising capital. Intellectual property (IP) tokenization, in particular, holds the promise of transforming intangible assets into digital tokens that creators and innovators can monetize on blockchain. However, the legal complexities of IP monetization often challenge existing frameworks, such as the Simple Agreement for Future Tokens[1] (SAFT) - initially designed to navigate U.S. securities regulations during the Initial Coin Offering[2] boom. This article argues that the emerging Revenue Participation Token Model, by tying token value to realized revenue and leveraging usufruct-like rights,[3] provides an efficient alternative to SAFT, addressing the unique complexities of IP tokenization under U.S. law.
The Challenges of IP Tokenization and SAFT’s Limitations
Tokenizing IP transforms ownership or rights associated with IP into digital tokens.[4] While promising, this approach faces significant legal hurdles. IP assets generate income but are often speculative.[5] These assets often rely on centralized management for income generation through royalties, licensing, or enforcement, which makes them highly dependent on issuer efforts. This dependency brings IP tokens under the purview of the Howey Test,[6] which determines whether an issued token qualifies as a security under U.S. law.
SAFT, which itself qualifies as a security, [7] was designed to sell tokens before they have functionality, [8] enabling companies to raise funds early. Despite SAFT’s intention to separate issued tokens from securities by delaying functionality, the speculative nature of token value often leads to their classification as securities.[9] In SEC v. Kik Interactive Inc., for instance, SAFT tokens were deemed speculative instruments whose value depended on the issuer’s efforts, leading to their classification as securities.[10]
For IP tokenization, SAFT’s reliance on deferred functionality does not align with the revenue-driven nature of IP assets, such as royalties and licensing fees, which require centralized oversight. This misalignment underscores the need for a framework tailored to IP’s unique characteristics.
RPTM: A Revenue-Driven and Compliant Alternative
The Revenue Participation Token Model (RPTM) provides a compelling alternative by tying token value directly to actual revenue rather than speculative future outcomes. The RPTM employs a two-token system:
1. participation tokens, which entitle holders to a share of an asset’s revenue, and
2. payout tokens, issued when revenue is generated.[11]
This system is inspired by usufruct rights,[12] allowing token holders to benefit from an asset’s income without owning the asset itself. By focusing on realized income, RPTM mitigates the risks associated with speculative growth, making it less likely to be classified as a security under the Howey Test.[13]
RPTM also emphasizes robust disclosure practices. Token issuers shall provide detailed information about revenue sources, risks, and distribution mechanisms. These practices align with the U.S. Securities and Exchange Commission’s focus on investor protection and foster confidence among stakeholders. For IP assets, which often involve complex and multifaceted revenue structures, such disclosures are particularly critical to maintaining market integrity.
A Comparative Perspective: RPTM vs. SAFT
RPTM addresses several shortcomings of SAFT, particularly in the context of IP tokenization:
1. By tying token value to realized income rather than speculative growth, RPTM minimizes the likelihood of being classified as a security under the Howey Test.
2. Detailed disclosures ensure regulatory compliance while building investor confidence.
3. RPTM’s focus on tangible revenue streams better reflects the realities of IP monetization, making it a more effective tool for creators and investors alike.
For instance, a music publisher might issue participation tokens granting investors a proportional share of royalties generated by an artist’s songs across platforms like Spotify or from synchronization deals. Investors would then receive payout tokens as revenue is realized, ensuring a clear and predictable monetization pathway. Unlike SAFT, this model avoids speculative pitfalls and aligns token mechanics with the operational requirements of IP assets. While Bowie Bonds demonstrated how future royalty streams could be securitized under traditional frameworks,[14] RPTM innovates within the blockchain space by prioritizing non-security classification.
Implementation Challenges
Despite its advantages, the successful adoption of RPTM depends on regulatory clarity. Policymakers should establish clear criteria distinguishing RPTM tokens from securities. Additionally, mandatory disclosure standards should be introduced to safeguard investors while maintaining market integrity.
Conclusion
RPTM offers a transformative alternative to SAFT for IP tokenization by tying token value to realized revenue and leveraging usufruct rights. Its focus on compliance and transparency makes it a robust framework for monetizing IP assets, fostering innovation, and bridging the gap between blockchain technology and tangible value creation.
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[1] Sykes, J. B., Legislative Attorney, Securities Regulation and Initial Coin Offerings: A Legal Primer, Congressional Research Service, R45301, version 2, 2018, pp. 23, available at https://sgp.fas.org/crs/misc/R45301.pdf [11/28/2024]
[2] Ofir, M., Sadeh, I., CO vs. IPO: Empirical Findings, Information Asymmetry, and the Appropriate Regulatory Framework, article 3, Vanderbilt Journal of Transnational Law, volume 53, issue 2, 2020, pp. 527, available at https://scholarship.law.vanderbilt.edu/vjtl/vol53/iss2/3/ [11/28/2024]
[3] Although usufruct originates in civil law systems, its principles find analogs in U.S. legal frameworks. Certain states, such as Louisiana, explicitly recognize usufruct due to their mixed civil and common law traditions. Elsewhere, common law achieves similar outcomes through life estates, trusts, and revenue-sharing agreements. For example, trust beneficiaries often enjoy income rights without holding ownership. Also, see Claeys, E. R., Intellectual Usufructs: Trade Secrets, Hot News, and the Usufructuary Paradigm at Common Law, in Intellectual Property and the Common Law, ed. Shyam Balganesh, Cambridge University Press, forthcoming 2012, pp. 7, available at https://www.law.gmu.edu/assets/files/publications/working_papers/1132IntellectualUsufructs.pdf [11/28/2024]
[4] Butzen, A. D., Tokenizing IP: How David Bowie and Blockchain Set the Stage for Creating a Digital Exchange for Intellectual Property Assets, UIC Review of Intellectual Property Law, University of Illinois Chicago, 2020, no page, available at: https://ripl.law.uic.edu/news-stories/tokenizing-ip-how-david-bowie-and-blockchain-set-the-stage-for-creating-a-digital-exchange-for-intellectual-property-assets/#_ftn1 [11/28/2024]
[5] Rustambekov, I., Gulyamov, I., Ubaydullaeva, A., Intellectual Property in the Digital Age, Università degli Studi Roma Tre Dipartimento di Giurisprudenza, 2024, pp. 246-247, available at: https://romatrepress.uniroma3.it/wp-content/uploads/2024/09/EBOOK-Intellectual-Property-in-the-Digital-Age.pdf [11/28/2024]
[6] Securities and Exchange Commission v. W.J. Howey Co., 328 U.S. 293 (1946), avalaible at: https://supreme.justia.com/cases/federal/us/328/293/ [11/28/2024]
[7] The SAFT Project: Toward a Compliant Token Sale Framework, Protocol Labs, 2017, no page, available at https://saftproject.com/ [11/28/2024]
[8] Sykes, J. B., Legislative Attorney, Securities Regulation and Initial Coin Offerings: A Legal Primer, Congressional Research Service, R45301, version 2, updated, 2018, pp. 23, available at https://sgp.fas.org/crs/misc/R45301.pdf [11/28/2024]
[9] The Cardozo Blockchain Project, Not So Fast-Risks Related to the Use of a “SAFT” for Token Sales. Reports. 1. 2017, pp. 2, available at https://larc.cardozo.yu.edu/blockchain-project-reports/1/ [11/28/2024]
[10] U.S. Sec. & Exch. Comm'n v. Kik Interactive Inc., 492 F. Supp. 3d 169 (S.D.N.Y. 2020), available at: https://casetext.com/case/us-sec-exch-commn-v-kik-interactive-inc [11/28/2024]
[11] See CoreLedger, “Revenue Participation Model,” no date, available at https://coreledger.net/revenue-participation-model/ [11/28/2024]
[12] See supra note 3.
[13] See Securities & Exchange Commission v. Glenn W. Turner Enterprises Inc., 474 F.2d 476 (9th Cir. 1973), available at https://casetext.com/case/securities-exchange-v-glenn-w-turner-ent [11/28/2024]
[14] Moyer, L., How David Bowie Changed Wall Street, N.Y Times, 2016, available at https://www.nytimes.com/2016/01/12/business/dealbook/how-david-bowie-changed-wall-street.html?mcubz=1&_r=0 [11/28/2024]
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