The US Securities and Exchange Commission is investigating Yuga Labs Inc., the creator of the Bored Ape Yacht Club collection of NFTs, over whether sales of its digital assets violate federal law, according to an unnamed source related to Bloomburg.
To preface this, Yuga has not been accused of any wrongdoings in this situation, and opening a probe does not mean that yuga will be sued at the end of the investigation.
The main reason for the probe is that the SEC is exploring whether the crypto startup broke federal law by issuing NFTs that act like stocks, as well as exploring the distribution of the Ethereum-based ApeCoin token that launched earlier this year.
One of the main focuses of the investigation is whether ApeCoin, which was distributed in March to holders of the Bored Ape and Mutant ape collections, is equivalent to a security. Among its other currently undisclosed use cases, the current main use case is that ApeCoin gives holders access and voting power to their DAO. The idea plan was to give the community a hand in shaping the future of the project as it continues on this journey through web3.
Eyes on Yuga Labs?
It has been rumored since as early as March of this year that the SEC has been looking into the world of Web3 and whether NFTs fall into the jurisdiction of securities based on the Howey test. Under that framework, an asset generally falls under the agency’s remit when it involves investors kicking in money to fund a company with the intention of profiting from the efforts of the organization’s leadership.
According to the SEC, the “investment of money” test is easily satisfied with the sale of digital assets because fiat money or other digitals assets are being exchanged. Likewise, the “common enterprise” test is also easily met. In most cases, whether a digital asset qualifies as an investment contract largely depends on whether there is an “expectation of profit to be derived from the efforts of others.”
A significant application of the Howey Test came in 2017 when the SEC ruled that the sale of DAO tokens in exchange for Ether violated federal securities law. Instead of taking enforcement action, the SEC warned that securities laws applied to token sales—effectively firing a warning shot at the cryptocurrency industry.
The regulators have increased the scrutiny of digital assets, crypto firms, and the whole crypto market in general. It is a part of the continuous efforts to ensure that the whole market and crypto firms follow the regulations. So, what better way for the SEC to come in and make a direct statement than by going after the top project in the ecosystem. While Yuga is currently not accused of any direct wrongdoing, this case and its results will be able to send ripples through the whole NFT ecosystem. We have seen how lawsuits like this have hurt cryptocurrencies before, such as the current battle that Ripple is going through against the SEC.
In a statement released by Yuga labs:
“It’s well-known that policymakers and regulators have sought to learn more about the novel world of web3. We hope to partner with the rest of the industry and regulators to define and shape the burgeoning ecosystem. As a leader in the space, Yuga is committed to fully cooperating with any inquiries along the way.”
It is a good sign that Yuga is willing to face this head on and this could turn out to be a net positive for the space overall, and in my opinion, there is no other team or project that is better suited to be the face of this in the current market.
Yuga has always shown its ability to adapt and overcome the unique challenges that have always come their way. It will be interesting to see any trickledown effect this has for other projects in the space.
ApeCoin Pain
At the time of writing Apecoin had not responded positively to the news as its current price is almost down 10% since the announcement came out. But the good news is it has seemed to temporarily find support and has not continued to plummet.
The market as a whole has also seemed to respond more positively to the news than expected, with the floor price of the Bored Ape NFT collection maintaining the same floor post announcement. This shows that the community has faith in Yuga throughout this process and are not willing to dump their assets.
It has even gone as far as being joked about on twitter as being part of their roadmap, known as The Trial of Jimmy the Monkey, by many of their holders. One thing that has always made NFTs strong was their communities, and this will be no different in my opinion as something that can make it or break it for Yuga at these current crossroads, is the support that their community is willing to give.
This is an unprecedented time for an NFT project and one that can go either way, so it will be interesting to see how much of the ride the community is willing to be along for.
Conclusion
While more than likely this will end with no major legal ramifications to come from it, it will be interesting to see how this plays out for regulation to the NFT space as a whole. Yuga not only has the team in place to be able to handle this, but they have the largest war chest and most funding to be able to handle this matter, something that cannot be said for all projects, so depending how this plays out might not affect Yuga as much as it will the smaller projects.
At the end of the day, we all knew this is something that would be coming sooner rather than later, and maybe, just maybe once this is all laid to rest the NFT space will come out with a new rejuvenated outlook.
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