The United States Security and Exchange Commission (“SEC”) is reportedly investigating Yuga Labs Inc., the creator of the Bored Ape Yacht Club, one of the most lucrative blockchain NFT (non-fungible token) projects. Earlier this year it was reported that the SEC is ramping up enforcements on digital asset offerings and considering whether the sales of NFTs may constitute a violation under federal securities laws. This investigation appears to be the first of its sort for such a prominent NFT collection.
In recent years, the SEC increasingly has enforced federal securities laws against cryptocurrency entities, such as crypto exchanges, influencers, and other market participants. To date, whether a digital asset is a security has turned on the legal interpretation of a Supreme Court decision from 1946, SEC v. W.J. Howey Co. Applying Howey and its progeny to coins, the SEC has identified several factors that may indicate securities status, such as public statements by the promoter promising monetary returns, whether the digital asset has a function, and the nature of the promoter’s role for ensuring the project is a success.
The SEC has yet to clarify how the Howey test would apply to the sale and distribution of NFTs, but NFT project owners, developers, and influencers may want to familiarize themselves with SEC guidance and enforcement actions in making decisions when it comes to NFT projects, such as whether to issue governance and utility tokens, whether to distribute rewards to digital asset owners, how to structure community engagement, and how to prepare marketing materials like whitepapers. In mid-March of this year, Bored Ape NFT collectors were able to participate in an accompanying asset, ApeCoin. ApeCoin granted access to a decentralized autonomous organization (“DAO”). The issuance of ApeCoin could be one of the variety of factors considered by the SEC in its investigation.