A U.S. judge has thrown out a lawsuit from investors against Yuga Labs, a Web3 company, stating that the case did not establish that non-fungible tokens (NFTs) qualify as securities under the law.
Judge Fernando M. Olguin ruled that the plaintiffs did not adequately demonstrate how the Bored Ape Yacht Club (BAYC), ApeCoin (APE), or other NFTs sold by Yuga met the three criteria of the Howey test, which the Securities and Exchange Commission (SEC) uses to evaluate whether a transaction qualifies as an investment contract. This lawsuit was first initiated in 2022.
According to Olguin, Yuga Labs advertised its NFTs as digital collectibles that provide exclusive membership benefits, classifying them as consumables instead of 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 further noted that the plaintiffs did not establish that the Bored Ape Yacht Club and other NFT collections created by Yuga function as a “common enterprise” where profits are expected from others, reinforcing legal precedent that suggests most digital assets are not classified as securities.
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No common enterprise with the explicit expectation of profit
Olguin indicated that the NFTs, which trade on public blockchain networks, did not create a continuous financial link between the buyer and Yuga Labs, hence they do not meet the criteria of a “common enterprise” under the Howey Test.
Investors who bought NFTs from Yuga paid a fee that was separate from the prices of the NFTs, as noted by Consensys attorney Bill Hughes wrote on X.
In conclusion, Olguin determined that Yuga Labs did not make clear promises of profit to potential NFT buyers, and that the project’s roadmap did not meet the Howey test’s criteria regarding the expectation of profit.
“Statements about a product’s inherent or intrinsic value are not necessarily statements about profit,” Olguin remarked.
“Statements about NFT prices and trade volumes are a somewhat closer call, but even then, these statements by themselves fail to establish an expectation of profit,” he added.
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