Why the SEC is going after Yuga Labs and what it means for NFTs.

The SEC is investigating Yuga Labs to determine whether any of the NFTs it has offered should be considered securities. If so, the proposal would be treated as stock for regulatory purposes and should follow the same disclosure procedures.

Specifically, the investigation would focus on the Bored Ape Yacht Club’s (BAYC) original collection of NFTs as well as its derivative, though technically unaffiliated, project, ApeCoin (APE).

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

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

Yuga Labs launched the wildly successful avatar project in 2021. Originally minted at 0.08 ETH each, the ten thousand items in the collection are collectively the most capitalized NFT in the world. If we were to value each individual coin, even the rarest ones, at the current price of ETH 0.08. At the low price of ETH 75.6 the BAYC’s cumulative value of ETH 756,000 would give the entire collection a minimum value of $975 million.

Today, 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.

Statement of Position

Now that the SEC is investigating Yuga Labs, it is clear that the NFT space is in the regulator’s crosshairs. This should be of concern to anyone who makes a living from NFTs in any capacity. It would not be surprising if today’s news discourages a number of budding projects from getting started, for fear of being subjected to repressive scrutiny.

The SEC has demonstrated that it applies established (if perhaps flawed) law to this space and is prepared to make its case in the U.S. court system. This investigation, coupled with other recent enforcement actions, indicates a resurgence of SEC aggressiveness that is part of a larger pattern over the past year. Its lawsuit against Ian Balina and Sparkster (in which it claimed that U.S. e-commerce laws had not been followed) is an example of this aggressiveness, and its settlement with Kim Kardashian over undisclosed promotional payments immediately comes to mind.

Second, it indicates that, no matter what anyone says about the subject, the SEC seems to view NFTs as securities. In its action against Kardashian last week, it used the word “security” in public statements to describe crypto-assets. It is highly likely that it could work on these bases if the Commission decides to pursue the charges; under certain conditions, works of art are already treated as securities for regulatory and investment purposes, and they must be registered as such.

Legal experts will parse the technical details, but it seems clear that after years of dragging its feet, the SEC is ready to move quickly and decisively in its efforts to establish ground rules for several sectors of the crypto-currency industry. In the absence of any sign of concrete legislation, Gary Gensler and his teams have the opportunity to establish rules on their own terms using their own language if they proceed carefully and within the confines of the judicial process.

But again, it’s worth remembering that the SEC has not charged Yuga Labs with any wrongdoing, and at this point there is no evidence that charges are imminent. Still, the news has many people nervous, perhaps rightly so.