Let's say you bake delicious croissants, and those who have tasted them once wait every day for fresh pastries. Today, an Instagram account with photos of croissants from different cafés and their reviews is likely a more profitable business.
Croissants are a traditional business. But if you are selling social media accounts, the validity of the deal costs much more. A recent Ukrainian alternative is the Law on Virtual Assets (the "Law"). What risks should be considered and how to mitigate them, why Ukrainian jurisdiction could become a new black for virtual assets – read on.
1. Social media account as a "virtual croissant"
The Law established a new kind of property – a "virtual asset" that can take different forms: cryptocurrencies, domain names, game avatars, social media accounts, NFT, etc.
An account can be part of different transactions:
(1) simple (selling, taking out a secured loan, contributing to a company's share capital);
(2) complex (sharing and distributing profits, creating derivative assets: NFT, virtual reality objects; assessing damages);
(3) sale as usual business (the account has enough contents and followers to generate income).
2. Social media account: croissant with filling
If followers are the key value of the account, it would suffice to agree on the basic terms. If you're buying an account for content or monetization – pay attention to the details, check the risks and structure the deal.
When negotiating the deal – check the croissant filling because the most valuable assets are hidden inside. This involves acquiring copyrights, trademarks, monetization rights, etc. Without them, you will have problems commercializing the asset.
If you own social media public groups (with a significant amount of followers), the filling may consist not only of advertisement rights. Media holdings may be attracted to acquire the “croissant” of this kind (as a place to sell ads of the clients).
3. The chef account baker
Although the account exists within the social media platform, the latter is barely involved in the transactions. The owner is the one who has the login and password, the one who controls content and monetization.
If the social media prohibits selling accounts, it is unlikely to consider claims from the parties to the transaction. A court may take into account this prohibition and challenge the validity of the deal. If something goes wrong, you should choose in advance the law of the country that validated agreements on virtual assets. The Law will increase the chances to obtain a defense in a Ukrainian court or even an arbitration institution.
4. Bakery without jurisdiction
The Law introduces a market for virtual assets with sellers and buyers, who may have agents and officially-registered marketplaces. The parties can be residents of different countries but choose the Ukrainian law to govern the purchase agreement.
If you are dealing with an agent (website acting as place for the virtual assets dealmakers), consider a dispute resolution mechanism. If the payment has to be made before the account is transferred, it is important that the agent has access to everything the buyer has to control. If the seller is in breach, the agent can hold the asset until the dispute is settled. When it comes to monetization, copyright or trademark – a typical website cannot meet this condition.
5. Do you need a receipt for selling a croissant?
The ownership of the account must be confirmed by a login and password, which ensure the access to the account. The agreement must contain a list of assets acquired with the account, namely:
(1) content with a list of copyrights and warranties;
(2) permissions from individuals to use their appearances and names;
(3) trademark use specifics.
Check if there are no restrictions on acquiring the asset and risks of termination of advertising agreements.
6. Croissant Diet (restriction on selling accounts)
While some social media do not allow licensing or selling accounts (e.g. Instagram), others do not prohibit selling accounts (YouTube, Telegram).
Before executing an agreement:
(1) check whether the social media imposes restrictions; and
(2) consult with a lawyer on how the restrictions might affect the validity of the transaction. A lawyer may advise on options to reduce financial and legal risks.
7. Bon appétit
Today, the websites that process payments are account selling agents. They promise assistance in case of a dispute, but until it goes to a court, you should not expect anything more than correspondence. The agent's ambiguous status affects the validity of agreement and thus the remedies available for the defense.
A court in your jurisdiction is unlikely to consider a claim against a counterparty that is known only by an avatar on a website. Evident risks are to lose money (if you are a buyer) or the account (if you are a seller).
8. Selling croissant in a new bakery
A virtual asset legally became a property, so unlawful actions against it may be penalised in criminal proceedings. If you chose Ukrainian law and ended up in court, you can claim to renew or to provide access to the account or other appropriate remedy as well as an interim injunction.
Now there is no need to invent how to convince the judge that the social media account is valuable property. The one who chose Ukrainian jurisdiction can defend the virtual asset or income received from the sale of the asset.
9. Croissant tax
The Law will take effect after the Tax Code of Ukraine is amended. If the circumstances are favorable, we expect the Law to become effective this autumn 2022.
The seller should be interested in taxation of virtual assets transactions because he will make a profit and must pay taxes. Some transactions won’t have any specifics in terms of taxation but, if you are a resident of Ukraine, wait for the legal updates.
We will follow the changes and keep you informed of the opportunities offered by the Law on Virtual Assets (on domain names, game avatars), so stay tuned.
Authors: Ilarion Tomarov, Counsel, Attorney-at-Law, Margaryta Tolmach, Associate
Published: AIN.UA, 12 May 2022