Why the SEC Is After Yuga Labs and What It Means for NFTs

Key Takeaways

The SEC is reportedly investigating Yuga Labs’ Bored Ape Yacht Club collection and its unaffiliated offshoot project ApeCoin.
Should the SEC bring charges, it would mark a major escalation in the Commission’s “regulation-by-enforcement” tactics.
In certain cases, works of art are already considered securities under U.S. law and must be registered as such. However, it is not yet clear that the SEC is applying this logic in this particular instance.

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In what will be seen as a major escalation in its crypto enforcement agenda, the Securities and Exchange Commission is said to be investigating Yuga Labs, the creators and distributors of Bored Ape Yacht Club, for illegal securities offerings.

Monkey Business

The SEC is investigating Yuga Labs to determine if any of the NFTs it has offered should be considered securities. If so, the project would be treated more like stocks for regulatory purposes and would have to follow the same disclosure procedures.

Specifically, the investigation is believed to focus on the original Bored Ape Yacht Club (BAYC) NFT collection in addition to its offshoot, though technically unaffiliated, project ApeCoin (APE).

ApeCoin was launched in March 2022 by the “unaffiliated” ApeCoin DAO, which denies any formal connection with Yuga Labs. Nevertheless, ApeCoin is intended to serve as the native currency for the Otherside ecosystem, Yuga Labs’ recent foray into the Metaverse. The only requirement to be a member of ApeCoin DAO is to hold APE.

As this is a private investigation, the SEC has not published any comment on the matter. Bloomberg reports that the source with knowledge of the probe has asked not to be named.

Yuga Labs launched the wildly successful avatar project in 2021. Originally minting at 0.08 ETH each, the ten thousand items in the collection are collectively the most valuable NFTs in the world. If we were to value each individual piece, even the rare ones, at the current floor price of 75.6 ETH, BAYC’s cumulative value of 756,000 ETH would make the entire collection worth, at minimum, $975 million.

Now, the SEC appears to be actively investigating whether either (or both) of these products constitute securities under current securities law. However, Yuga Labs has not been accused of any wrongdoing, and no charges have been filed.

Crypto Briefing’s Take

Now that the SEC is investigating Yuga Labs, it’s clear that the NFT space is within the regulator’s crosshairs next. This should give anyone making their living off of NFTs in any capacity cause for concern. It would not be surprising for today’s news to discourage any number of aspiring projects from launching, lest they be brought under punitive scrutiny. 

The SEC has demonstrated that it is willing to apply established (if perhaps imperfect) laws to the space and that it is prepared to make its arguments before the American judicial system. This investigation, taken alongside other recent enforcement actions, indicates an uptick in aggression from the SEC that fits a larger pattern over the last year. Its suit against Ian Balina and Sparkster (in which it claimed the U.S. held jurisdiction over Ethereum transactions) and its settlement with Kim Kardashian for undisclosed promotional payments immediately spring to mind.

Second, it indicates that whatever anyone says on the subject, the SEC seems to be thinking of NFTs as securities. In its action against Kardashian last week, it used the word “security” three times in public statements to describe crypto assets. It could very likely work on these grounds should the Commission decide to pursue charges; under certain conditions, works of art are already treated as securities for regulatory and investment purposes, and they have to be registered as such.

Legal experts will hash out the technicalities, but it seems apparent that after years of dragging its feet, the SEC is prepared to move quickly and decisively in its efforts to set ground rules for several sectors of the cryptocurrency industry. With no sign of any concrete legislation moving toward the finish line in Congress, Gensler and his cohorts have an opportunity to set rules on their own terms using their own language if they proceed carefully and within the confines of the judicial process. 

But again, it must be restated that the SEC has not accused Yuga Labs of any wrongdoing, and at this point, there is no evidence that charges are imminent. Still, the news is making many people nervous—perhaps with good reason.

Disclosure: At the time of writing, the author of this piece owned ETH and some NFTs.

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