The Class Action Lawsuit Against Yuga Labs

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Are NFTs Securities? Today we explore an essential question with pretty big implications for the entire Web 3 industry.

The law firm Scott+Scott is currently organizing a class action lawsuit against Yuga Labs the company behind Bored Ape Yacht Club. The lawsuit alleges that BAYC and their native token Apecoin were falsely marketed as securities with guaranteed returns while the digital assets plummeted in value over the last few months.

Key to this lawsuit’s success will be the court’s determination of whether NFTs and Apecoin should be classified as securities. In order to be classified as a security, a financial offering must pass the Howie Test. The way the test works is that, if the contract satisfies all 4 “prongs”, it “passes” the Howey Test and is, therefore, classified as a security. The four prongs to be used to determine whether something is a security are as follows:

(1) an investment of money
(2) in a common enterprise
(3) with the expectation of profit
(4) to be derived from the efforts of others.

While the various prongs of the Howie test and its application to NFTs and crypto can be debated, in reality, something will be labeled a security when the SEC decides they want to regulate it. Right now it does not look like the SEC intends to regulate NFTs. The simple reason is that labeling NFTs as securities will open up pandora’s box for the SEC. According to Decrypt “it’s no further a stretch for the SEC to begin regulating the sales of paintings, sculptures, and tapestries — items far different from stocks, the agency’s bread and butter.”

While the SEC does not want to regulate the art market, native tokens like Apecoin could be a different story. Ape Coin is a cryptocurrency launched by ApeCoin DAO and distributed to holders of Bored Ape NFTs. Apecoin is the primary currency used in the Yuga Labs ecosystem. It allows holders to purchase digital assets like plots of land in the Otherside Metaverse and grants holders the ability to vote on governance proposals of ApeCoin DAO. What is interesting here is that Apecoin tends to fluctuate with the current standing of BAYC and Yuga Labs. It could be argued that Apecoin satisfies the four prongs of the Howie Test and is, therefore, a security.

Scott+Scott has yet to file a formal complaint in federal court as they are still in the preliminary stages of finding plaintiffs who have suffered losses from their investments in Yuga Labs. As a well-funded organization with a legion of lawyers, Yuga has likely prepared for this eventuality. What will be interesting to see is how this type of case plays out in federal court as it will set a precedent for the entire Web 3 industry.

Thank you for reading.

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Sources:

https://decrypt.co/105871/yuga-labs-threatened-with-possible-class-action-lawsuit

https://blockworks.co/yuga-labs-faces-potential-class-action-lawsuit-over-inflated-bayc-nfts/

https://news.bitcoin.com/yuga-labs-may-face-a-potential-class-action-lawsuit-over-apecoin-and-nft-sales/

https://cointelegraph.com/news/yuga-labs-inappropriately-induced-bayc-investors-class-action