Judge Dismisses 2022 Investor Lawsuit, Rules Yuga NFTs Are Not Securities

A US judge has dismissed a lawsuit from an investor against Web3 company Yuga Labs, stating 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 show how Bored Ape Yacht Club (BAYC), ApeCoin (APE), or other NFTs sold by Yuga fulfilled the three criteria of the Howey test, a benchmark used by the Securities and Exchange Commission (SEC) to identify whether a transaction qualifies as an investment contract. The lawsuit was initially filed in 2022.

Yuga Labs promoted its NFTs as digital collectibles with membership benefits to an exclusive community, categorizing them as consumables rather than investment contracts, Olguin stated. 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 by Yuga represent a “common enterprise” with an expectation of profits derived from others, citing legal precedents that suggest 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 relationship between the buyer and Yuga Labs, thus not qualifying as a “common enterprise” according to the Howey Test, Olguin commented.

Investors who bought NFTs from the company paid a fee to Yuga that was separate from the NFT prices, noted Consensys attorney Bill Hughes wrote on X.