The U.S. Securities and Exchange Commission (SEC) has opened investigations into the activities of Yuga Labs, creators of the Bored Ape Yacht Club (BAYC), over unregistered offerings. The commission’s investigation hovers around whether or not non-fungible tokens (NFTs) operate as securities that fall within its purview.
According to a Bloomberg report, the SEC has yet to make a formal accusation against Yuga Labs for any wrongdoing as the investigations are still in the preliminary stages. However, a spokesperson for the NFT maker said that the company has not breached any securities law and will work with the Commission to resolve any gray areas.
“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 design and shape the burgeoning ecosystem,” said Yuga Labs’ spokesperson. “As a leader in the space, Yuga is committed to fully cooperating with any inquiries along the way.”
Bloomberg also reported that the securities watchdog is scrutinizing the public sale of ApeCoin, a virtual currency issued to holders of BAYC digital collectibles and other NFTs made by the company. While the SEC’s investigation is still in the preliminary stages, the matter could morph into a legal battle in the future as the Commission has not shied away from the courts to punish perceived offenders.
Recently, the SEC has been on a roll in going after digital asset firms for violating securities law. The institution reached a $100 million settlement with BlockFi for “failing to register the offers and sales of its retail crypto lending product” and brandished the threat of legal action against Coinbase (NASDAQ: COIN) over its proposed lending product.
Securities hang like the Sword of Damocles
The question of whether digital assets are securities has seen industry players hold their breaths in trepidation. For now, the SEC has attempted to classify some virtual currencies as securities by using the Howey test as a determinant.
Under the Howey test, an asset is considered a security if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Under this definition, the SEC instituted legal action against Ripple Labs on the basis that the XRP token is a security. There is also concern that Ethereum might fall under the category of being a security following its transition to proof-of-stake.
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