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Bored-Ape Creator Yuga Labs Faces SEC Probe Over Unregistered Offerings
The US Securities and Exchange Commission is investigating Yuga Labs Inc., the creator of the popular Bored Ape Yacht Club collection of NFTs, over whether sales of its digital assets violate federal law.
Harshvardhan
9:04 11th Oct, 2022
Policy

The SEC is examining whether certain nonfungible tokens from the Miami-based company are more akin to stocks and should follow the same disclosure rules, according to a person familiar with the matter, who asked not to be named because the probe is private. Wall Street’s main regulator is also examining the distribution of ApeCoin, which was given to holders of Bored Ape Yacht Club and related NFTs. The cryptocurrency was created in part for web3, a vision of a decentralized internet built around blockchains.

Yuga hasn’t been accused of wrongdoing and the opening of an SEC probe doesn’t mean the agency will sue the firm.

“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,” Yuga said in a statement to Bloomberg News. “As a leader in the space, Yuga is committed to fully cooperating with any inquiries along the way.”

A spokesperson for the SEC declined to comment.  

The investigation is the latest attempt by SEC Chair Gary Gensler to ensure the crypto market adheres to its regulations. Gensler has repeatedly said that most crypto assets should be regulated by the agency since they have characteristics of securities as defined by a 1940s Supreme Court decision. That ruling gave the agency authority to label investments as securities when there’s an expectation of profit from management. In recent years, the regulator has brought dozens of enforcement cases against digital asset firms for failing to register their offerings, including a $50 million penalty against BlockFi Inc. in February.

Yuga Labs, which was founded in 2021, has become one of the most prominent brands in crypto. Its cartoon monkey NFTs are a sought after status symbol -- buyers include celebrities Jimmy Fallon and Madonna -- and often trade for hundreds of thousands of dollars.

NFTs are digital assets that can be used to denote ownership of items such as paintings or sports memorabilia. The tokens can also serve as certificates of authenticity that can’t be replicated.

The SEC has been probing the NFT market broadly, including the crypto exchanges where they trade, Bloomberg News reported in March. As part of that review, the SEC is investigating so-called fractional NFTs, which involve breaking down the assets into units that can be easily bought and sold.

The SEC is also investigating whether ApeCoin, which was distributed in March to certain holders of Bored Ape NFTs, is tantamount to a security. ApeCoin gives holders influence over another crypto-native entity known as a decentralized autonomous organization, or DAO. The idea was to give the Bored Ape community a hand in shaping the decentralized, blockchain-powered vision of the internet that venture capitalists often describe as web3. The Bored Ape DAO will use the blockchain to enable and record votes on decisions related to how the community is managed.  

The price of ApeCoin fell about 9% to $4.76 as of 1:45 pm in New York, according to data from CoinMarketCap.

The key legal question is whether NFTs are securities as defined by the agency. The SEC applies the so-called Howey test, which comes from a 1946 US Supreme Court decision, to decide if something is a security. 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.  

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