Finally wrapped your head around the Taco Bell NFT drop? Not so fast. Time to learn about “social tokens,” a rapidly-growing class of blockchain-based assets used to connect with consumers in new and exciting ways.

Social tokens hold incredible promise for celebrities, brands, creators, and the agencies that support them, but there has been little if any coverage of the legal issues raised by this new technology.  This primer aims to do just that:  give folks diving into the space, and the lawyers supporting them, some of the key issues and risks to consider.

What are Social Tokens?

Social tokens can take many forms, but one of the most common is the token designed to connect brands and creators with their fans. Two platforms, Rally and Roll, seem to be leading the social token charge. At a basic level:

  • Social tokens can allow a content creator (be it a brand, an influencer, an athlete or a celebrity) to create their own branded coin.
  • Social token holders can get exclusive access to content or incentives, like first access to new and exclusive merch, token-holder-only discounts, a vote on key decisions, access to one-on-one conversations through Discord chats, etc.
  • Social tokens rise and fall in value based on supply and demand, which also gives fans some skin in the game. Essentially, if the value of the token drops, holders may be incentivized to become evangelists in order to increase their own wealth. As Rally explains, social tokens are the new way to “make money from your fans, with your fans and for your fans.”
  • Like Bitcoin or Ether, social tokens operate using blockchain technology, but they are platform-agnostic. This can help creators monetize across channels.

In fact, the rise of social tokens arguably coincides with a push to remove social media networks as intermediaries, given concern that the platforms have too much control over public discourse and take too big of a cut of advertising and content creator dollars. As is often the case, out of antipathy comes innovation. And here we are.

Legal Issues with Social Tokens

Social tokens raise many legal issues, some of which are outside the scope of this post (e.g. securities questions, money transmission issues, etc.).

Here are some issues for lawyers and their clients to consider:

  • Classic False Advertising Issues. If fans are purchasing social tokens based on a promise of access and rewards that are unavailable in other contexts, those launching social tokens should ensure that the promised benefits are really as “exclusive” as advertised. If a token holder thinks she’s getting an exclusive discount, but realizes she’s being offered the same reward as was offered to the Fan Club, problems could arise!
  • Endorsement Issues. Given the FTC’s recent focus on the influencer industry, many now know of the requirement to disclose material connections. Think #ad! Here, if a fan owns a brand’s social token, they too could be incentivized to speak more positively about the company, to get others to buy in, and to otherwise act as a brand ambassador. Should the fan be required to disclose their token ownership when publicly speaking about the brand? While we haven’t seen any definite guidance on this, it seems pretty clear that an ownership stake in a brand property could materially affect the weight or credibility of a fan’s endorsement and thus require disclosure.
  • Clear and Conspicuous Disclosure of Terms. Like any other reward or loyalty program, purchasers of social tokens should clearly understand all applicable material terms before expending any money, including knowing exactly what they’re buying, how they earn and receive rewards (the availability of which should not be contingent on the value of the token), where and how fees apply (think gas fees!), and any other important rules that might apply to the community. It is also crucial to think through how to maximize the likelihood that any set of terms will be enforceable, what happens if terms need to change, and how token holders will receive adequate notice of any such modifications.
  • Clearance Hurdles. Of course creators want to showcase exciting profile pages for their social tokens. But old rules still apply: permission is required before posting protected content. Thus, those uploading assets to dress their social token profile pages should ensure they have permission from all applicable rights holders. As a brand, it would also be prudent to monitor the marketplace. Do you have a vendor or spokesperson selling a social token?  It might make sense to check out their page to ensure that they’re using your intellectual property only as permitted.
  • Broader Liability Issues. The value of social tokens, like all blockchain-based assets, is subject to extreme volatility and may be adversely impacted by a decline in public interest, change in law, regulation or policy, and technical problems, among other things. Blockchain-based transactions also are irreversible and there are no refunds. This can carry material risk for those looking to play in the space. If access to a social token or its associated rewards is terminated, consumers may not only expect to be compensated for their loss, but could even bring legal action (including for breach of contract, breach of the covenant of good faith and fair dealing, fraudulent inducement, unjust enrichment, and violations of state statutes prohibiting unfair and deceptive acts). It is thus important for brands, content creators and platforms involved in the social token space to clearly understand who is left holding the bag should any problems arise.