Into the Metaverse: M&A in the NFT Market in 2022

Sales of non-fungible tokens^[1] (“NFTs”) rose to over $17 billion in 2021,^[2] with the market forecast to grow 20 times bigger in the next 8 years, rising to $240 billion by 2030.^[3] Already in the first quarter of 2022, the NFT market saw more than $12 billion in trades.^[4]

Although the NFT market is relatively new, we are now seeing an increasing range of established and emerging businesses across sectors circle this market looking for new opportunities — from big corporations seeking to reward loyal customers, obtain access to new cult-like communities, or create a link between real-world assets and the “metaverse”^[5] to emerging artists creating new royalty structures or revenue-sharing models to better monetize their original content.

As NFT activity remains strong, we anticipate increased M&A activity during the next 3 quarters of 2022, including consolidation among NFT marketplaces, which, in turn, will raise novel legal issues for dealmakers.

Recent M&A in the NFT Market

The end of 2021 saw established businesses boosting their presence in the digital realm through M&A.

On December 13, 2021, Nike announced its acquisition of RTFKT, a company that creates virtual sneakers and other collectibles in the form of NFTs.^[6] Earlier last year, RTFKT in a collaboration with the digital artist Fewocious sold 600 real sneakers paired with virtual ones (which were released as NFTs) in just 7 minutes, generating $3.1 million.^[7] John Donahoe, Nike’s President and CEO, stated that “this acquisition is another step that accelerates Nike’s digital transformation and allows us to serve athletes and creators at the intersection of sport, creativity, gaming and culture.”^[8]

The same month, Adidas, one of Nike’s biggest competitors, announced partnerships with NFT project Bored Ape Yacht Club, GMoney and PUNKS Comic.^[9]

Special purpose acquisition companies (“SPACs”) also began getting into the game in 2021.

Getty Images announced on December 10, 2021 that it will merge with CC Neuberger Principal Holdings II, a SPAC formed through a partnership between CC Capital and Neuberger Berman.^[10] The Getty Images’ CEO has discussed publicly that the company’s plans for growth include pursuing opportunities in the NFT market.^[11]

Also in December 2021, Infinite Assets (also known as “InfiniteWorld”), a metaverse infrastructure platform, announced that it will merge with Aries I Acquisition Corporation, a SPAC.^[12] Among other things, InfiniteWorld provides companies with the infrastructure that they need to create NFTs.^[13]

2022 has already seen significant M&A activity in the NFT market. Notably, on March 11, 2022, Yugo Labs, the creator of Bored Ape Yacht Club, announced its acquisition of the intellectual property of the CryptoPunks and Meebits collections from Larva Labs.^[14] The acquisition gives Yugo Labs control over 3 of the most popular NFT collections on the market.^[15]

M&A in the NFT Market in the Next 3 Quarters of 2022

We expect to see more M&A activity in the NFT market in the next 3 quarters of this year, as companies in a wide range of industries continue looking for commercial opportunities in the evolving metaverse to gain access to content creators and important client relationships.

In many ways, this M&A activity will mirror the wave of transactions elsewhere in the crypto space that we described in an earlier article: https://www.legal500.com/guides/hot-topic/crypto-ma-unique-legal-and-regulatory-considerations/?export-pdf.

We believe that a key and unique area for M&A in the NFT market will be consolidation among platforms and marketplaces that facilitate the trade of NFTs, though this will involve significant complexity from both a legal and regulatory perspective.

There are already many competing marketplaces, but they come in different shapes and sizes and with a variety of approaches in hosting content creators and trading in their work.

Currently, there are 3 typical business models:

• Open — marketplaces allow any content creator to mint and trade NFTs on their platforms (e.g., OpenSea and Rarible).
• Proprietary — marketplaces offer NFTs created by the marketplace operators and do not facilitate the display or trade of any other digital collectables (e.g., Top Shot and Bored Ape Yacht Club).
• Curated — marketplaces where the marketplace operators select which NFTs may be minted, displayed and traded (e.g., SuperRare and Nifty Gateway).

As the NFT market expands, it is likely that we will see some of the biggest marketplaces look to acquire smaller rivals. It is important to understand the above 3 typical business models, as the legal issues raised by each may vary. In the context of M&A, dealmakers should consider, among other things, how to:

• Address different terms of use across different marketplaces, as explained above.
• Reconcile different structures that marketplaces use to protect intellectual property rights associated with original content, license such content and minimize third-party infringement risks.
• Comply with relevant regulatory regimes, not least Know-Your-Customer and anti-money laundering regulations.
• Mitigate cybersecurity and data privacy risks at a time of growing vulnerability in these areas and increased scrutiny by regulators.

Consideration of the legal issues raised by the varying business models will likely affect which marketplaces rivals target (i.e., should a marketplace looking to acquire target a rival that operates according to the same business model to avoid potential integration complications?). Different approaches to intellectual property rights makes this particularly true. For example, marketplaces may have different terms with respect to who owns content created on the marketplace platform and what rights the users of the marketplace platform have (i.e., display rights, right to copy, right to sell, right to store, etc.).

Conclusion

Despite these legal issues, NFT transactions could well be an important part of the answer for dealmakers looking to achieve growth by tapping into the commercial opportunities offered by the metaverse and Web3.

With expert advice and careful planning, investors can use M&A to become a part of the evolution of these exciting new environments, and we expect many to continue to do just in 2022.

Footnotes

^{[1] Non-fungible tokens are blockchain-enabled unique digital files that typically contain data that point to an online version of digital art, collectibles (such as digital trading cards) or other digital content (which visually appear in gif, jpeg, or other common media formats) or a physical asset, and usually records ownership, evidences authenticity or provides certain rights of use.
[2]https://fortune.com/2022/03/10/bored-apes-cryptopunks-jolt-nft-market-to-billions-in-sales/.
[3]https://markets.businessinsider.com/news/currencies/luxury-nfts-metaverse-56-billion-market-revenue-2030-morgan-stanley-2021-11.
[4]https://dappradar.com/blog/dapp-industry-report-q1-2022-overview.
[5] The term “metaverse” refers to something akin to cyberspace where people can interact through avatars (i.e., virtual representations of their digital personae — think The Matrix) but with a broader physical and commercial potential. Although what it will be is still evolving (see e.g., https://www.wired.com/story/what-is-the-metaverse/), already companies are lining up to join it.
[6]https://news.nike.com/news/nike-acquires-rtfkt.
[7]https://www.wsj.com/articles/nfts-and-fashion-collectors-pay-big-money-for-virtual-sneakers-11615829266.
[8]https://news.nike.com/news/nike-acquires-rtfkt.
[9]https://twitter.com/adidasoriginals/status/1466443459951271939?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1466443459951271939%7Ctwgr%5E%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fcointelegraph.com%2Fnews%2Fadidas-enters-the-metaverse-with-nft-partnerships.
[10]https://www.globenewswire.com/news-release/2021/12/10/2349924/0/en/Getty-Images-to-Become-Publicly-Traded-Company-Through-Combination-with-CC-Neuberger-Principal-Holdings-II.html.
[11]https://www.bloomberg.com/news/newsletters/2021-12-10/getty-images-ceo-talks-nft-aspirations-after-4-8-billion-deal-with-blank-check-company.
[12]https://www.businesswire.com/news/home/20211213005343/en/InfiniteWorld-a-Leading-Metaverse-Infrastructure-Platform-for-Brands-Announces-Plans-to-Become-a-Publicly-Traded-Company-via-a-Merger-with-Aries-I-Acquisition-Corporation.
[13]Ibid.
[14]https://www.businesswire.com/news/home/20220311005470/en/Yuga-Labs-Acquires-CryptoPunks-and-Meebits-from-Larva-Labs-Grants-IP-and-Commercial-Rights-to-Individual-Owners.
[15]https://markets.businessinsider.com/news/currencies/bored-ape-yacht-club-nft-cryptopunks-meebits-opensea-larvalabs-yugolabs-2022-3.}