The metaverse is emerging as the next frontier of digital commerce, with businesses across all industries spending millions of dollars buying digital real estate and investing in platforms to become market leaders. This has made companies with metaverse operations prime targets for venture capitalists and other investors looking to enter the ground floor. Although the companies involved in the metaverse offer attractive opportunities, investors should pay close attention to the legal issues present for these targets. This alert highlights a few key legal issues investors should keep in mind when reviewing and negotiating investment documents.
What is the Metaverse?
At its core, the Metaverse is the next generation of the Internet. Built largely on decentralized blockchain technology instead of centralized servers, it consists of immersive three-dimensional experiences with dynamic digital markets, persistent and traceable digital assets, and a strong social component. While some elements remain ambitious, consumers are already flocking to metaverse platforms and spending significant amounts of money on digital assets, making it an exciting opportunity for virtually any business, even those dependent on physical space or internet. face-to-face interaction, to generate revenue. Meanwhile, many tech companies are working on next-generation consumer electronics, like smart glasses, which they hope will take e-commerce to the next level and make today’s two-dimensional web browsing a thing of the past.
All of these developments create fertile ground for venture capitalists and other investors to bet on which technologies will be profitable in the future.
Diligence issues in transactions involving the Metaverse
Investors evaluating targets with metaverse trades should carefully evaluate those trades. Here are three key due diligence considerations:
Custody of digital assets. Companies involved in the metaverse often own and depend on digital assets such as cryptocurrency and non-fungible tokens (“NFTs”), which are particularly vulnerable to loss and theft. Investors should ensure that potential targets have set up a secure blockchain wallet and adopted appropriate access and security controls.
Platform Terms and Conditions There are several metaverse platforms, and they all have tradeoffs. Some, including Roblox and Fortnite, offer access to more consumers but generally give companies less control over program content. Others, such as Decentraland and the Sandbox, offer companies greater control but smaller audiences and higher barriers to entry. Investors should critically evaluate the terms and conditions of the selected platform to ensure that they match the business objectives of the target.
Registered IP. Investors should ensure that targets have filed appropriate trademark applications covering core metaverse goods or services and securing all available blockchain domains, which can be used to facilitate metaverse payments and direct users to the blockchain content, such as websites and decentralized applications. Given the accelerated adoption of blockchain domains as well as the limited dispute resolution remedies available, targets should secure intellectual property rights now.
Special Representations, Warranties and Indemnities
Given the novelty of Metaverse operations, investors may also seek to supplement their due diligence with special representations and warranties relating to Metaverse operations.
Regulatory conformity. Investors should consider whether specific representations and indemnities are required regarding compliance of the target’s metaverse operations with applicable regulations. This is especially true for heavily regulated industries such as healthcare, alcoholic beverages, and financial services. For example, an investor considering investing in a metaverse financial services startup may want special assurances that the target’s metaverse operations comply with applicable regulations relating to the provision of financial advice in all relevant jurisdictions for its users. targets.
Intellectual Property Infringement and Enforcement. Investors may want special statements certifying that a target’s metaverse operations do not infringe third-party intellectual property and that the target enforces its intellectual property rights in the metaverse.
Data confidentiality. Investors must ensure that the operations of the Target Metaverse, including the collection, use and transfer of any User Data, comply with data privacy rules in all jurisdictions relevant to its Target Users.
While typical purchase contract statements can provide general coverage, focusing specifically on metaverse operations compliance can be helpful in ensuring that management is adequately focused on the target’s metaverse operations. This is especially critical because metaverse operations can span multiple jurisdictions and the regulatory system is always evolving.
Ready to enter?
The metaverse represents a tremendous opportunity for investors as technology threatens to change the way people interact with businesses and each other in the digital environment. But as with every new frontier, there are legal and regulatory hurdles to consider and overcome; some are new, some are familiar.
© 2022 ArentFox Schiff LLPNational Law Review, Volume XII, Number 140