A U.S. judge has dismissed a lawsuit from an investor against Web3 company Yuga Labs, stating that the case did not illustrate how non-fungible tokens (NFTs) fit the legal definition of securities.
Judge Fernando M. Olguin ruled that the plaintiffs failed to prove how the Bored Ape Yacht Club (BAYC), ApeCoin (APE), or other NFTs offered by Yuga met the three criteria of the Howey test, which the Securities and Exchange Commission (SEC) employs to assess whether a transaction constitutes an investment contract. The lawsuit was initiated in 2022.
Olguin indicated that Yuga Labs promoted its NFTs as digital collectibles with membership benefits to an exclusive club, categorizing them as consumables rather than investment contracts. He noted:
“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 stated that the plaintiffs did not demonstrate that the Bored Ape Yacht Club and other NFT collections introduced by Yuga constituted a “common enterprise” with the expectation of profits generated by others, citing legal precedent indicating that most digital assets are not securities.
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No common enterprise with the explicit expectation of profit
The NFTs, which are traded on public blockchain networks, failed to establish a continuous and dependent financial connection between the buyer and Yuga Labs, and do not qualify as a “common enterprise” under the Howey Test, according to Olguin.
Investors who acquired NFTs from Yuga paid a fee that was separate from the NFT prices, Consensys attorney Bill Hughes wrote on X.
In conclusion, Olguin ruled that Yuga Labs did not explicitly promise profits to potential NFT purchasers and that the project’s roadmap did not meet the expectations outlined by the Howey test regarding profit anticipation.
“Statements about a product’s inherent or intrinsic value are not necessarily statements about profit,” Olguin remarked.
“Statements about NFT prices and trading volumes are a somewhat closer call, but even then, these statements alone fail to establish an expectation of profit,” he added.
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