Investors Beware ApeCoin and Bored Ape Yacht Club

Arguably the best-known collection of non-fungible tokens (NFT) to hit the market are the Bored Ape Yacht Club (BAYC) NFT. These images of monkeys dressed in different clothes with varying facial expressions have taken the internet by storm and attracted celebrities such as Snoop Dogg, Justin Bieber, Jimmy Fallon and Kevin Hart.

The prices of these NFTs skyrocketed at one point. Six of them have sold for over $2 million, and in October 2021, a BAYC sold for $3 million.

But what might not be so well known is that there is actually a company behind BAYC NFTs. Yuga Labs started working on BAYC in February 2021 before launching the collection in April of the same year. As its fame and notoriety skyrocketed, the company went a step further and now owns the rights to other popular NFT collections like CryptoPunks and Meebits.

Yuga Labs didn’t stop there. This year it launched its own crypto token, ApeCoin (MONKEY 3.64%)and also unveiled a metaverse platform, Otherside, where investors could buy virtual real estate with their new ApeCoin.

In a short time, Yuga Labs has established itself as the industry standard for Web3 development and metaverse technologies – so much so that it is even compared to being the disney (SAY 3.50%) from Web3.

Future problems

Now, however, this NFT star might run into a few obstacles. Earlier this month, the Securities and Exchange Commission (SEC) announced that it would investigate Yuga Labs over concerns that BAYC NFT and ApeCoin are unregistered securities. On the heels of the news, ApeCoin fell 10% and investors in Yuga Lab assets may have a tougher time.

Although the investigation itself does not equate to guilt, if the assets are found to be securities, the potential consequences could include fines, restitution, and possibly even civil or criminal charges.

To determine whether an asset qualifies as a security, the SEC uses what is called the Howey test. Named after a Supreme Court case in the 1940s, the Howey Test defines a security as “an investment of money in a common enterprise with the expectation of profit from the efforts of others.”

Let’s unbox this. The key elements here are “the expectation of profit” and the “efforts of others”. ApeCoin was created through the efforts of other people, especially developers who probably spent hours writing and analyzing code.

Once it was released, investors likely bought ApeCoin hoping it would turn a profit. The same goes for BAYC NFTs. People bought them because of the potential value they would produce. Can you see where this might lead?

Why investors need to stay informed

Whether cryptocurrencies and NFTs are securities is part of a growing dilemma that is slowly making its way to the forefront on the SEC agenda. Although no official legislation has yet been passed, it seems more likely that the SEC will chain cryptocurrencies and blockchain companies like Yuga Labs into its jurisdiction.

This episode offers a valuable example for investors concerned about what the future might hold for other blockchain-based assets. Surveys like this are becoming more common and should be a reminder that crypto investors should remain diligent in their assessment of assets before adding them to their portfolio.

Classifying crypto-assets as securities would not mean the end of cryptocurrencies, but it would certainly change the landscape a lot. In a future where the SEC becomes the cryptocurrency watchdog, blockchain companies and developers would likely need to register as securities and provide additional information to increase transparency, roughly. in the same way that publicly traded companies currently do.

If this is what the future holds, it could mean the end of pump and dump cryptocurrencies, in which developers promote a new coin or blockchain, get rich and let investors hold the bag. Every investor should keep this in mind before buying any cryptocurrency, to ensure their portfolio has what it takes to weather the impending regulations.

RJ Fulton has no position in the stocks mentioned. The Motley Fool holds positions and recommends Walt Disney. The Motley Fool recommends the following options: January 2024 long calls at $145 on Walt Disney and January 2024 short calls at $155 on Walt Disney. The Motley Fool has a disclosure policy.

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