Yuga Labs faces class-action lawsuit, Bored Ape Yacht Club, ApeCoin to be classified as securities?
Last month, Yuga Labs was suing an artist for trademark infringement, but now Yuga Labs itself is facing a class-action lawsuit that accuses Yuga Labs' Bored Ape Yacht Club (BAYC) NFTs and its token ApeCoin (APE) of being securities.
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Claiming High Returns but Plunging
The law firm Scott+Scott is currently organizing a class-action lawsuit against Yuga Labs. It accuses Yuga Labs of inflating prices through celebrity endorsements, continuously promoting upward prospects and substantial investment returns.
However, when the rise was exposed to be entirely reliant on marketing rather than fundamental technology, its token APE plummeted from a high of 24 US dollars to 6.4 US dollars in the past three months.
Once the lawsuit is filed, the key to the success of the lawsuit depends on whether BAYC NFT is deemed a security, representing a similar entity to company shares with appreciation potential. In this case, Yuga Labs may be penalized for failing to disclose the necessary information for issuing securities and registration obligations.
SEC Unwilling to Regulate NFTs?
As of now, SEC has never classified any NFT as a security. Decrypt cites Brian Fyre, an associate professor at the University of Kentucky Law School, stating that regulating NFTs could lead to the broad art market falling under the jurisdiction of SEC, which the agency has long resisted.
Whether any financial product constitutes a security is determined by the "Howey Test," established when SEC sued the Howey Company in 1946, consisting of:
- Investment of money
- In a common enterprise
- With an expectation of profits
- From the efforts of others
Based on these standards, there is a risk that most cryptocurrencies and initial coin offerings (ICOs) projects could be considered unregistered securities, a topic that has been stirred by SEC's ongoing regulatory actions.
Brian Fyre also believes that classifying BAYC as a security may be challenging, but Scott+Scott's allegations include tokens APE issued by "ApeCoin DAO" falling under the securities category, which may be more convincing.
The Ambiguous Definition of NFTs
Brian Fyre points out that although the federal government has always avoided labeling NFTs as securities, it was only in early June that the Department of Justice accused a former executive of OpenSea of insider trading. The accusation states that the executive could anticipate certain NFT projects appearing on the homepage before being listed and buy in advance to make a profit. The strangeness of this situation lies in:
"If not trading on the securities market, why talk about insider trading?"
While the executive's actions were labeled "insider trading," the Justice Department only charged wire fraud and money laundering, avoiding officially labeling the traded items (NFTs) as securities.
Overall, the vague definitions of NFTs and cryptocurrencies make the outcome of lawsuits unpredictable. Will the tokens issued through DAO airdrops, such as APE, also be classified as securities? Will the Yuga Labs lawsuit force the SEC to provide clearer regulations? Perhaps the crypto community is eagerly awaiting these answers.