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SEC investigates BAYC and ApeCoin interpretation: what happened to Yuga Labs

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Will the US SEC's sudden investigation of the Boring Ape parent company affect the future of NFT?

Original title: "Burst | Interpretation of the SEC Investigation Boring Ape NFT 20221012"

Original source: Alpha Rabbit Research Notes

Original text Compilation & Analysis: Alpha Rabbit

Ins and outs

SEC Being on the Boring Apes Yacht Club (Bored Ape Yacht Club) How will it affect the future of NFT if the investigation of its parent company?

According to Bloomberg, the U.S. Securities and Exchange Commission (SEC) is investigating Yuga Labs Inc., the creator of the Boring Ape Yacht Club series of NFTs. ,The main investigation is whether the sale of its digital assets violates federal law.

According to an industry insider,The US Securities and Exchange Commission is reviewing whether the NFT issued by Yuga Labs Inc. is similar to securities and requires Subject to the same disclosure rules as securities, in addition, key Wall Street regulators are also reviewing the issuance of ApeCoin, which is issued to holders of the Bored Ape Yacht Club and related NFT.

Yuga Labs has not been accused of wrongdoing (Yuga hasn』t been accused of wrongdoing), of course, US Securities Just because the trade commission investigates them doesn't mean the company will necessarily be prosecuted.

Yuga Labs mentioned in a statement to Bloomberg News: “ As we all know, policymakers and regulators have been seeking to understand the novel world of web3. We hope to cooperate with other members of the industry and regulators to define and shape this emerging ecosystem. As a Web3 pioneer, Yuga will cooperate with regulators. All inquiries."

(The author’s comment: the public relations ability is still very strong)

The investigation is a new move by Securities and Exchange Commission (SEC) Chairman Gary Gensler to ensure the cryptocurrency market complies with its regulations, as Gensler has repeatedly said that most crypto assets should be owned by the agency Regulatory because they have the characteristics of securities as defined by the Supreme Court in the 1940s, prior precedent empowering the SEC. In recent years, the SEC has brought dozens of enforcement cases against digital asset firms for failing to register their offerings with the SEC, including a $50 million fine against BlockFi Inc. in February.

Yuga Labs, established in 2021, has become one of the most prominent brands in the cryptocurrency field due to the emergence of Boring Ape NFT, with buyers including many celebrities such as Madonna.

NFT is indeed a digital asset that can be used to represent ownership of items such as paintings or sports memorabilia, and these Tokens can also serve as non-tamperable certificates.

However, the SEC has been investigating the NFT market extensively, including participating cryptocurrency trading platforms, since March 2022, as a review As part of the NFT, the US Securities and Exchange Commission is also investigating some NFTs, especially those that can break down assets into NFTs that can be easily bought and sold.

SEC is still investigating whether ApeCoin is equivalent to a security, ApeCoin was distributed to some Bored Holder of Ape NFT. The price of ApeCoin was down about 9% to $4.76 as of 1:45 p.m. Oct. 12, 2022 in New York, according to data from CoinMarketCap.

The key legal question is whether NFTs are securities as defined by the SEC.

The US Securities and Exchange Commission usually uses the Howey test (Howey test) to determine whether an issue is a security:

What is the Howey test?

Note: In the United States, companies that want to issue Security Token need to be regulated by the SEC. Blockchain projects that fail to comply with these regulations risk being fined or shut down. Therefore, it is important to understand whether the token you want to research or invest in is a target token or a security token.

Generally speaking, according to the Howey test, if a Token cannot be characterized as a SecurityToken, then it is a Utility Token;

Howey test refers to a The criteria for determining whether a particular transaction constitutes an offering of securities. This test stems largely from a 1946 decision by the U.S. Supreme Court that used a specific standard for determining whether a particular transaction constituted an offering of securities. If this transaction is deemed a security, it is subject to the United States Securities Act of 1933 and the Securities Exchange Act of 1934. At present, many ICOs on the market may be identified as securities issuance and thus subject to relevant supervision.

Standards of the Howey Test:

1. The Investment of Money

2. Invest in common enterprise (Common Enterprise)

3. Investors have income expectations and expect profits ( Expectation of Profit)

4. Do not directly participate in the operation, but only rely on the efforts of the sponsor or a third party. (Effort of Others)

In order to determine the possibility of a Token being a Security Token or a Utility Token, you can use Crypto Rating Council Website (Cryptocurrency Rating Committee) website gives the score, the higher the score, the more likely the Token is a Security Token;

In Under this framework, an asset generally falls within the SEC's jurisdiction if it involves an investor putting money into funding a company with the intention of profiting from the efforts of the organization's leadership.

Previous Summary

Note that in June 2022, the United States Attorney's Office of New York As mentioned in the press release, after the arrest of former OpenSea executive Nate Chastain, prosecutors accused him of insider trading, fraud, and money laundering with NFT.

Officials (prosecutors) call the actions of former OpenSea executives "insider trading", a term that is actually reserved for secondary market stocks or other Phrases for stock trading.

From the point of view of the expression, is this insider trading, or is the official trying to identify the meaning of NFT as a security? This case is more important, because the nature and labels of these words, if it is determined that NFT is a security, may have a great impact on the future of digital assets.

In the opinion of Alma Angotti, Partner (Global Legislative and Regulatory Risk) at Guidehouse, in a legal sense, NFT is likely to become an umbrella for stocks and securities. For example, after NFT is likely to pass the Howey test, it is actually a kind of securities in essence. If you buy an NFT and hope the price goes up so you can make money from it, it's not much different from a security.

Angotti previously served as a law enforcement officer for the SEC, the U.S. Department of the Treasury's Financial Crimes Enforcement Network and the Financial Industry Regulatory Authority, and now focuses on Guidehouse's The business of cryptocurrencies, digital assets and fintech.

“Misappropriating a company’s confidential information is fraud, and once you transfer the proceeds of fraud through the monetary system, it’s money laundering,” Angotti said . New York Attorney Damian Williams echoed this in a press release: NFTs may be innovative, but this type of criminal scheme is not.

Nathaniel Chastain betrayed OpenSea and used its confidential business information to make money for himself. Prosecutors’ charges against Nathaniel Chastain show that U.S. officials remain committed to eliminating insider trading, whether it occurs on the stock market or on the blockchain.

According to the DOJ indictment, Nathaniel Chastain used OpenSea's information on which NFTs would be displayed on its marketplace prior to purchasing approximately 45 NFTs in the summer of 2021. inside information. These NFTs can often be sold for two to five times their purchase price, the indictment said.

Chastain was charged with one count of wire fraud and one count of money laundering, which together carry a potential sentence of up to 40 years in prison.

Will this case and allegations change the future of NFT?

Expert Angotti said that although OpenSea fired Chastain after the allegations first came to light, Angotti pointed out that the company's fatal flaw was that it did not To take appropriate control measures to reduce this risk, the platform needs to consider, where is the risk? Because there can be no fraud on the platform, and criminals are not expected to launder money through the platform. Even if Chastain is acquitted and NFT is not defined as a security, officials will still pay attention to this industry. The U.S. Department of Justice clearly has crypto and NFTs as a law enforcement focus; they have an entire task force.

Keep watching the SEC and Yuga Labs.