Could A Bored Ape + CryptoPunk + ApeCoin = A Security?

The NFT space is now accustomed to novel use cases and new project launches on a near daily basis. From NFTs involving real estate, to property in the metaverse, to NFT funds, innovation is the name of the game. But until a few days ago, we had not seen a corporate-style acquisition in the NFT space. This news is another reminder that technological innovation continues to outpace regulatory guidance.    

On March 11, 2022, Yuga Labs, the creator of the famous Bored Ape Yacht Club (“BAYC”) NFT collection, announced that it had acquired the intellectual property rights to two other blue chip NFT collections owned by Larva Labs. Yuga Labs acquired the intellectual property rights to the CryptoPunks and Meebits NFT collections in a blockbuster deal, along with 423 CryptoPunk NFTs.  

CryptoPunks, a collection of 10,000 unique pixelated digital images of punkish characters, is one of the earliest NFT projects on the Ethereum blockchain, and one of the most valuable. BAYC is also a digital image NFT collection depicting cartoon images of apes with different characteristics and accessories, each in a unique state of “boredom.” Ownership of a BAYC NFT also gives the holder access to the BAYC community and a variety of perks associated with being a member of the club.

In the world of NFT-based art collections, Yuga Labs’s purchase of CryptoPunks and LarvaLabs’s IP associated with that project might be seen as ground-breaking as if Apple had acquired Microsoft in the 1990’s.

Yuga Labs reportedly purchased the copyright to the art used in CryptoPunks which was previously owned and controlled by LarvaLabs. In contrast to LarvaLabs’s prior approach of restricting use of the IP rights associated with the CryptoPunks NFTs, Yuga Labs announced that it was “giving full commercial rights to the NFT holders. Just like we did for BAYC and MAYC owners.” If Yuga Labs follows through with this promise, owners of CryptoPunks may now have the commercial rights to use their NFT for things like derivative projects, marketing, and a number of other uses.   

Right on the heels of this acquisition, it was also announced that a cryptocurrency associated with the BAYC was going to be issued -- ApeCoin ($APE). This newly created cryptocurrency describes itself as “a token for culture, gaming, and commerce used to empower a decentralized community building at the forefront of web3.” Although the coin is linked to Yuga Labs’s BAYC project, ApeCoin was officially released by ApeCoin DAO, a so called “decentralized autonomous organization.” The link between the two organizations is apparent, as Yuga Labs Tweeted “we’re adopting ApeCoin as the primary token for the Bored Ape Yacht Club ecosystem as well as future Yuga products and services.”   

ApeCoin was initially issued (or “airdropped”) to owners of the BAYC NFT collection, and several related NFT collections. This means that NFT holders could claim a predetermined number of ApeCoins simply by owning the NFT. But just a day after the coin was issued, and 94 million ApeCoins had been claimed, it was reported that the price of ApeCoin plummeted by nearly 80%, from approximately $37 per coin to $7 per coin. While the future and the success of ApeCoin is uncertain, just hours after it launched, some of the most prominent cryptocurrency exchanges announced that they were listing ApeCoin as a tradeable cryptocurrency on their platforms. Coinbase, one of the largest cryptocurrency exchanges, announced that it was listing ApeCoin on its platform the day after the coin was issued. See https://www.coinbase.com/how-to-buy/apecoin.

What Might the SEC Think of the BAYC?

While the news of blue chip NFT acquisitions and new cryptocurrencies is exciting, this recent news is a good example of how innovation in the NFT and cryptocurrency space continues to outpace regulatory guidance. This can pose significant issues for the innovators launching these projects and the exchanges offering them for sale.  

As recently as August 2021, SEC Chair Gary Gensler commented that cryptocurrency was the “Wild West” and that many tokens are offered and sold as securities – thus bring them under the purview of the SEC. Meanwhile, the Commodities Futures Trading Commission (CFTC) (Gensler’s former employer) issued guidance indicating that cryptocurrencies like Bitcoin and Ether are commodities subject to the jurisdiction of the CFTC. Adding to the mix, a federal jury in Connecticut concluded that some cryptocurrency products were not securities. There is a similar regulatory vacuum with respect to NFT classification and guidance, with SEC Commissioner Hester Pierce advocating for formal guidance concerning NFTs as recently as January of 2022.  

What does all of this mean for ApeCoin and the BAYC? That is yet to be determined, but we do know that if a regulatory body or court were to scrutinize the coin, it would likely begin by applying the well-known “Howey-test” to determine if the cryptocurrency is an investment contract, and therefore a security. Setting aside the challenges of applying a 76 year-old test to a cryptocurrency offering that was issued yesterday, that analysis would look to determine whether the purchase of ApeCoin constitutes an (1) investment of money, (2) in a common enterprise, and (3) with profits to be derived solely from the efforts of others.

Similar to the concerns facing many other cryptocurrencies and other digital assets, how the SEC views the cryptocurrency offering could determine whether that cryptocurrency comes within SEC oversight. This is particularly true for ApeCoin if the SEC were to conclude that the profits owners of the coin were expected to enjoy were derived solely on the efforts and success of the BYAC, despite the fact that the coin itself is issued by the Ape DAO.  How the SEC ultimate views projects like ApeCoin will also have a broader impact on the cryptocurrency exchanges that are listing the coin.  These issues, and a host of others, are all critical to evaluate in this rapidly involving environment.

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