Are NFTs securities? Why is SEC probing Yuga Labs?

Yuga Lab, the company behind the popular Ethereum-based nonfungible token collection, Bored Ape Yacht Club (BAYC), is now under probe by the U.S Securities and Exchanges Commission (SEC). The Commission is investigating the company to determine whether its digital assets are securities and if the company violated federal law by issuing them. 

Why is SEC probing Yuga Labs?

SEC’s investigation of Yuga Labs is directed at revealing whether some of the nonfungible tokens issued by the company are similar to stocks and should follow the same disclosure rules. Additionally, the regulator is also investigating the distribution of ApeCoin, which was allocated to the holders of BAYC, and some other collections launched by Yuga Labs. 

ApeCoin is the governance and utility token of the Ape Ecosystem. The Ethereum-based token was adopted by Yuga Labs in March and distributed to holders of BAYC and other collections, also serving as the official currency for the BAYC Ecosystem, according to an earlier statement made by Yuga Labs.  

Meanwhile, SEC’s probe does not constitute any lawsuit against Yuga Labs, nor has the company been accused of violating any law.

Are NFTs securities?

SEC has yet to establish its stance on NFTs, whether the assets fall under securities law. The Commission reportedly uses the 1946 Howey test to determine whether or not an asset classifies as a security, which is subject to their regulation. 

The Howey test deems an asset as security when it involves investors putting in money to a company with the intention of making a profit from the efforts of the company.  

Over the recent months, however, the regulator has been broadly reviewing the nonfungible token market, including marketplaces and the concept of fractionalized NFTs, according to Bloomberg. Perhaps, the SEC’s investigation of Yuga Labs could be a part of its broader effort to scrutinize NFTs.