Yuga Labs Threatened With A Potential Class Action Lawsuit

Last month, Yuga Labs, the $4 billion company behind popular NFT group Bored Ape Yacht Club (BAYC), made headlines by Prominent artist sued for trademark infringement.

Now, the company may find itself on the other side of the courtroom.

Law firm Scott + Scott is currently filing a class action lawsuit against Yuga Labs, according to an announcement from the firm late this week. The lawsuit will allege that Yoga falsely promoted Bored Ape NFTs and ApeCointhe group’s original Ethereum token, as a security with guaranteed returns but has actually depreciated in the past three months.

The plaintiffs in the case have yet to file a formal complaint in federal court. Scott + Scott is still in the initial phase of a search for plaintiffs who incurred losses associated with the purchase of Yuga-backed NFTs and tokens from April to June. The company did not immediately respond to a request for comment for this story.

The key to the lawsuit’s success, once filed, will be the court’s decision on whether the non-fungible tokens are securities, similar to a stake in a company that can increase in value. If the court found BAYC NFTs to be securities, Yuga Labs would have failed to make the necessary disclosure and recording obligations that come with the securities offering.

But that may be far-fetched.

“I see a very, very, very small possibility that the Securities and Exchange Commission will want to step in there and…describe that [Bored Ape NFT collection] “As a security measure,” said Brian Fire, a professor of law at the University of Kentucky. “I think they’re going to resist that tooth and nail, because that would open them up to a huge can of worms and force them to organize all sorts of other things they don’t want to organize.”

The Securities and Exchange Commission has so far refrained from definitively designating any NFT as a security. This may have something to do with the fact that such a move would likely place the broader art market under the supervision of the SEC, something the agency has long resisted.

“I don’t really understand that the SEC knows what it wants to do just yet. And in fact, in some ways, I’m afraid they don’t know what’s going on.”

Technically, whether a financial offer constitutes a security is determined by the so-called “Howey test,” a four-pronged assessment established by the Supreme Court in 1946. But in reality, things are not black and white.

“Do you know when something is safe? When the SEC decides it wants to regulate it — that’s when it becomes a security. The real question is, does the SEC want to regulate this particular market? The reality is that the SEC doesn’t want to regulate it,” Fire said. Regulating the art market.

A potential class action against Yuga would effectively allege that customers purchased artwork, expecting it to increase in value based on the artist’s (or here, the group’s) reputation. If the courts find Yuga Labs in trouble here, the Securities and Exchange Commission cannot begin to regulate sales of paintings, sculptures, and textiles—things very different from stocks and agency bread and butter.

So classifying Yuga’s NFT kits as securities could be an uphill battle. But the lawsuit will also claim that BAYC’s native token, ApeCoin, is security – and that argument could have more appeal.

ApeCoin, a cryptocurrency launched by Yuga in March, gives holders the ability to vote on the governance proposals of the ApeCoin DAO, an independent, decentralized decision-making organization related to the Bored Ape Yacht Club ecosystem. Currency value Tends to fluctuate with the fortunes of BAYC and Yuga Labs.

“Something like ApeCoin, I can definitely see the SEC saying it looks a lot like a stake in a company,” Fyre said.

Although the federal government has largely refrained from classifying NFTs as securities, the Department of Justice last month A former NFT marketplace executive commissioned OpenSea for insider trading. The accusations allege that the CEO made deals informed by insider knowledge about the NFT kits that will be featured on the OpenSea homepage.

“Strangely enough, how can you trade insider unless you are doing it with something that is a security, or trading the stock markets?” Fire said.

But despite describing the CEO’s actions as “insider trading,” the Justice Department only charged him with electronic fraud and money laundering, and avoided any official designation of traded items – NFTs – as securities.

This lawsuit against Yuga could force the SEC to finally make a commitment on whether it views NFTs, or even governance tokens like ApeCoin, as securities. or ma agencyy again elected To jump.

“I don’t really understand that the SEC knows what it wants to do just yet,” Fire said. “And in fact, in some ways, I’m afraid they don’t know what’s going on.”

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