NFTs – Non-Fungible Campaign Contributions?

The Fair Political Practice Commission (FPPC) recently issued an opinion addressing campaign reporting obligations for Non-Fungible Tokens (NFTs). The Leiderman Commission Opinion addresses how to report contributions of NFTs. As defined by the FPPC, NFTs are digital assets that represent ownership of items, such as artwork or video clips. These assets utilize blockchain technology to create a unique identifier to assign and prove ownership of the digital asset. NFTs are typically bought and sold online, frequently with cryptocurrency, and stored on a blockchain that allows for immutability and public verification of ownership.

The Leiderman Opinion, which was issued on March 24, addresses the specific issue of campaign reporting obligations and permissibility of a candidate committee hiring a vendor to create and sell NFTs in the form of digital NFT trading cards on the vendor’s platform. The example cited by the FPPC involved a campaign committee that created three tiers of NFTs and set a fixed price and fixed number for each tier (e.g., $50, $500, $1,000). The committee’s vendor would create, mint and sell the NFTs on its platform, charge the campaign committee a percentage of the sale, then remit the remaining proceeds from the NFT sales to the committee. 

The FPPC first analyzed the term “contribution” under the Political Reform Act (PRA) and related regulations, with a specific goal of identifying what part of an NFT sale qualifies as a contribution.

• A “contribution” is a payment, forgiveness of a loan, payment of a loan by a third party, or an enforceable promise to make a payment except to the extent that full and adequate consideration is received, unless it is clear from the surrounding circumstances that it is not made for political purposes (Govt. Code § 82105, 2 CCR § 18215).
• The term “contribution” includes the purchase of tickets for concerts, dinners, rallies and similar fundraising or other events (Govt. Code § 82015).
• It is presumed that a payment received by a candidate or controlled committee has been made for political purposes (2 CCR § 18215).
• The term “full and adequate consideration” means “fair market value” throughout the PRA (Section 82025.5; Smith Advice Letter, No. A-98-117).
• “Fair market value” is whatever it would cost the candidate or committee to obtain the same or similar goods or services on the open market (Sremaniak Advice Letter, No. A-03-092; Zakson Advice Letter, No. A-00-182; Miller Advice Letter, No. I-96-243; In re Hopkins (1977) 3 FPPC Ops. 107).

The FPPC needed to determine whether NFT sales are more similar to (1) gifts or incentives for making a campaign contribution and the entire amount deemed a contribution or (2) the sale of campaign merchandise where the contribution amount is the price paid minus any fair market value on the underlying item. Based largely on the foundation that these NFTS are essentially worthless and have no “fair market value” and that the campaign committee set the price of the tiered NFTs, the FPPC concluded that the sale proceeds received by the campaign committee are contributions. Further, the FPPC expressed concern that allowing campaign committees to set the fair market value for NFTs could create an avenue for circumventing contribution limits and reporting requirements.

The FPPC’s determination did seem the most rational, as this campaign committee was unilaterally setting the price and quantity of the NFTs. However it leaves unanswered questions in other scenarios. For example, if the campaign committee merely created, minted and sold these NFTs to the highest bidder (i.e., at no set price), would the logic that they have no fair market value still be sound? Further, and is the case with multiple existing popular NFT projects, if a campaign committee’s NFTs somehow become extremely valuable and eligible for trade, were resold for a profit multiple times by each new owner, and the campaign committee received a percentage of each sale, would the FPPC’s same logic still apply? With multiple free market sales for a monetary amount, the idea that the NFT had no fair market value diminishes.

The Leiderman Commission Opinion provides clear guidance that a campaign committee creating its own NFTs and setting price and quantity, must consider all sale proceeds contributions. However, questions involving different NFT scenarios and down-the-road resales of campaign committee NFTs remain unanswered and may lead to a different or expanded FPPC determination.