A US judge has dismissed a lawsuit from investors against Web3 company Yuga Labs, concluding that the case did not prove that non-fungible tokens (NFTs) qualify as securities under the law.
Judge Fernando M. Olguin ruled that the plaintiffs did not demonstrate how Bored Ape Yacht Club (BAYC), ApeCoin (APE), or other NFTs sold by Yuga fulfilled the three criteria of the Howey test, which the Securities and Exchange Commission (SEC) uses to assess whether a transaction qualifies as an investment contract. The lawsuit was initiated in 2022.
Olguin highlighted that Yuga Labs promoted its NFTs as digital collectibles with exclusive membership benefits, deeming them consumables rather than investment contracts. He stated:
“The fact that defendants promised that NFTs would confer future, as opposed to immediate, consumptive benefits does not alone transmute those benefits from consumptive to investment-like in nature.”
The judge also noted that the plaintiffs did not demonstrate that the Bored Ape Yacht Club or other NFT collections launched by Yuga function as a “common enterprise” with profit expectations stemming from others, reinforcing legal precedents that consider most digital assets as non-securities.
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No common enterprise with the explicit expectation of profit
The NFTs, traded on public blockchain networks, did not create an ongoing financial relationship between the purchaser and Yuga Labs, and do not meet the “common enterprise” criteria under the Howey Test, Olguin concluded.
Investors who acquired NFTs from Yuga paid a fee that was separate from the NFT prices, Consensys attorney Bill Hughes wrote on X.
In the end, Olguin determined that Yuga Labs did not make clear profit promises to potential NFT buyers and that the project’s roadmap did not fulfill the Howey test’s profit expectation requirements.
“Statements about a product’s inherent or intrinsic value are not necessarily statements about profit,” Olguin commented.
“Statements regarding NFT prices and trading volumes are a somewhat closer call, but even then, these statements alone do not create an expectation of profit,” he added.
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