Yuga Labs, the company behind the popular Bored Ape Yacht Club NFTs, may be looking down on a lawsuit soon.
New York law firm Scott and Scott is seeking to attract complainants to file a class action lawsuit against Yuga Labs, alleging the NFT juggernaut tapped celebrities to talk about the value of their tokens and attract “unsuspecting investors” with the promise of high returns.
A slew of stars, including Gwyneth Paltrow, Eminem, and Madonna, have acquired Bored Ape Yacht Club (BAYC) NFTs and promoted them on social media over the past year. In January, when Jimmy Fallon and Paris Hilton mocked their cartoon monkeys on national television, it sounded a lot like a bad infomercial. Many of the new Ape celebrity collectors belong to Creative Artists Agency (CAA), which owns part of OpenSea, a popular marketplace for NFTs. (Madonna executive Guy Oseary represents Yuga Labs and is also an investor in Yuga Labs.)
To pass, Scott and Scott will need to prove that BAYC NFTs are securities such as stocks, bonds, or options. Legally, anyone issuing a security must register it with the Securities and Exchange Commission to prevent fraud.
NFTs, because they are not fungible, are generally not considered securities, which are. Each NFT is meant to represent a single object. But they can be considered securities if they pass the “Howey test,” a regulatory standard used to determine whether a transaction qualifies as an investment contract.
According to Howey’s test, an investment contract exists if there is “an investment of money in a joint venture with a reasonable expectation of profit from the efforts of others”. Yuga Labs, in this case, would be the actor behind the promotion of NFTs.
“I think some NFTs could be securities, and the courts and the SEC will analyze the offer according to the Howey test,” said Alma Angotti, former chief enforcement officer of the US Treasury Department’s Financial Crimes Enforcement Network, which now works as a partner. at consulting firm Guidehouse Inc, Artnet News told.
This litmus test was recently applied to Coinbase in a insider trading case against a former employee and his friends. Furthermore, the SEC would be search in whether Coinbase illegitimately let users trade digital assets that were not registered as securities.
“Whether [Yuga Labs] was essentially selling the product as an investment that would increase in value based on the company’s efforts, then a court might consider it a security,” Angotti said. But if Yuga Labs sells its NFTs – like most NFTs are sold – on the assumption that they can increase in value just because people like them, then probably not.
“But it could still be fraud if they misrepresent it,” she said.
For similar cases, she pointed to sales of counterfeit works of art or a case involving wine fraudulently sold as rare and old. In other words, it may seem like something unique and special, but in reality, it is not.
Scott and Scott’s proposed class action would also target Bored Ape Yacht Club’s native token, Apecoin. It is likely that they will have a much easier time asserting that Apecoin is a security. Apecoin has been listed on Coinbase since its launch in March, and SEC Chairman Gary Gensler has long maintained that most cryptocurrencies are securities.
Scott and Scott haven’t filed a complaint yet. It is looking for disgruntled investors who suffered losses associated with Yuga Labs tokens between April and June. In late April, just before Otherdeed’s massive virtual land sale by BAYC in a proposed metaverse, Apecoin was worth $27. It then dropped to $3.50.
Neither Scott and Scott nor Yuga Labs responded to a request for comment.
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