NFT creator Yuga Labs faces SEC probe in new regulatory reach

Securities and Exchange CommissionNovember 08, 2022

SEC will examine whether NFTs can be classified as securities. This new development follows the CFTCs recent lawsuit against Ooki DAO and the recent SEC’s lawsuit against Kim Kardashian. The SEC is examining whether certain nonfungible tokens from the Miami-based company Yuga Labs are more akin to stocks and should follow the same disclosure rules.
Yuga has not been charged with any wrongdoing, and the SEC has not threatened to bring legal action against the company despite the opening of a probe. Yuga has disclosed it is committed to fully work with the SEC on the inquiry and seeks to be part to define and shape the rapidly changing ecosystem.
Established in 2021, Yuga Labs has grown to be one of the most well-known names in the cryptocurrency industry. Its NFTs of cartoon primates (Bored Apes) are in high demand and sometimes sell for hundreds of thousands of dollars. The main use case of the NFT is acting as a digital status object for most as the NFT denotes ownership of the digital object.
Whether NFTs fall within the agency's definition of securities is the main legal question. In order to determine whether anything is a security, the SEC uses the so-called Howey test, which originates from a 1946 US Supreme Court case. According to that concept, an asset often comes within the agency's purview when investors contribute funds to a business with the goal of benefitting from the leadership of the organization.