Tag: Bill Hinman

When Wells notice? Yuga Labs, the SEC is coming for you

I’ve been saying for months now that ApeCoin is an unregistered penny stock offering, and Yuga Labs should expect the SEC to come knocking.

Well, guess what? They are knocking. The SEC is probing Yuga Labs to see if Bored Ape Yacht Club NFTs — as well as ApeCoin — are unregistered securities offerings. On Oct. 10, Bloomberg wrote: [Bloomberg]

“The SEC is examining whether certain nonfungible tokens from the Miami-based company are more akin to stocks and should follow the same disclosure rules, according to a person familiar with the matter, who asked not to be named because the probe is private. Wall Street’s main regulator is also examining the distribution of ApeCoin, which was given to holders of Bored Ape Yacht Club and related NFTs.”

Yuga Labs is the parent company of Bored Ape Yacht Club, a collection of NFTs with spin-off NFT projects, such as Mutant Ape Yacht Club and Bored Ape Kennel Club. Yuga is also behind the yet-to-launch MMO game Otherside — which it is building in partnership with Animoca Brands — and the issuance of Otherdeeds, NFTs representing land parcels in the game. 

Bored Ape Yacht Club launched ApeCoin, an ERC20 token, on March 17. The very same day, ApeCoin listed on Coinbase — a first for a coin, but then two Andreessen Horowitz (a16z) people sit on the Coinbase board, and a16z is a major Yuga Labs backer. 

Are Bored Apes securities?

A token is deemed a security if it passes the Howey test, which says that an investment contract — a security — exists “when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” [SEC]

Are NFTs securities? Possibly? Maybe? They are non-fungible, so the argument is not so clear. Each NFT is unique, and in the case of Bored Apes Yacht Club, they represent art. Regulators have yet to issue any strong warnings against NFTs. 

However, some NFTs do have characteristics of securities. In April, two state regulators ordered Sand Vegas Casino Club to stop selling NFTs, alleging the Cryprus company was illegally offering unregistered securities. Sand Vegas had promised holders of its Gambling Apes NFTs profits from the proceeds of the casinos, so you can see why they landed into trouble. [Texas order; Alabama order; Coindesk] 

Otherdeed land sale

Likewise, Yuga Labs’ Otherdeed NFTs have characteristics of securities. Otherdeeds represent 200,000 plots of virtual land in the upcoming Otherside metaverse.  

Yuga Labs sold 55,000 Otherdeeds on April 30, 2022, in what it called the “biggest mint in NFT history.” Yuga netted over $300 million worth of ApeCoin in the sale. ApeCoin was the only currency accepted. [Twitter] 

Specific wording in the terms makes it sound like Yuga suspected Otherdeeds might attract the attention of regulators. You had to essentially agree that you were buying these for fun, not for profit: [Otherdeed purchase agreement, archive] 

“Artistic Purposes Only. Purchaser represents and warrants that Purchaser (A) is purchasing the Otherdeed for personal enjoyment purposes, and (B) is not purchasing any Otherdeed with the intent or expectation of profits from any appreciation in value or otherwise from the Otherdeed or any Access Rights that may from time to time be granted by Animoca or third parties.”

Do Otherdeeds pass the Howey test? Let’s see. 

  • Was there an investment of money? Yes. Buyers paid 305 ApeCoin to purchase an Otherdeed on April 30. 
  • Was there a common enterprise? Yes. The Otherside game. Yuga sold virtual plots of land to investors in exchange for the promise of owning land in a functioning metaverse tomorrow.
  • Was there an expectation of profit? Yes. Despite the language in the terms, Otherdeed owners immediately began flipping their Otherdeeds for more money. Case in point: Otherdeed #59906 sold for 625 ETH ($1.5 million) just 10 days later. Some Otherdeeds even came with one or more creatures on them called Kodas, also represented by NFTs. Otherdeeds with Kodas fetch a significantly higher price on third-party marketplaces. [The Block; OpenSea]
  • Was the profit to be derived from the efforts of others? Yes. If the investor has a significant hand in the success of an investment, it’s most likely not an investment. Otherdeeds are meant to involve the participants in the game. According to Otherside’s website, “Rather than a static representation of a piece of land, your Otherdeed is designed to evolve along with what you choose to do in the game.” But the game does not exist yet. So, as of now, everything is based on the efforts of Yuga and Animoca and their ongoing promotion of the game. [Website]

ApeCoin, a clear case

While Otherdeeds could be a securities offering, there is an even stronger case to be made that ApeCoin is a security.  

ApeCoin is fungible, and it carries voting rights. Critically, its value is dependent on the work of Yuga Labs. 

SEC Chair Gary Gensler has given clear warning about ERC20 tokens. He has already stated, more than once, that most cryptocurrencies are securities. [CNBC; SEC]  

“I think, and my predecessors thought this as well, that most of these tokens are in fact that the public is investing, anticipating and hoping for profit, based on somebody else’s efforts.”

Yuga Labs never sold ApeCoin directly for cash. However, they did sell Bored Ape and Mutant Ape NFTs for money. If you were a holder of one of these NFTs, you got an allotment of ApeCoin worth up to $80,000. Many chose to HODL, hoping the price would go up. It did, for a while. [Decrypt]

When Yuga Labs held its massive Otherdeed land sale, ApeCoin surged to $27.50. It’s now trading for just under $5.

But we’re decentralized!

Yuga Labs went to great lengths to hide the fact that they were behind ApeCoin, saying it was issued by the ApeCoin DAO made up of members who were not Yuga Labs employees. APE Foundation was also formed to administer the decisions of the ApeCoin DAO. 

If you hold ApeCoin, you get voting rights — akin to voting shares in a company. You can vote on proposals put forth by the ApeCoin DAO. In June, ApeCoin holders voted to keep the token on the Ethereum blockchain. [Bloomberg]

Around the time that ApeCoin launched, Yuga Labs received a $450 million round led by a16z. Investors in the round also received a distribution of ApeCoin. 

Here’s how 1 trillion ApeCoin were initially distributed:

  • 1% to charity
  • 8% to Yuga Labs founders 
  • 14% to launch partners, including a16z and Animoca 
  • 15% to Yuga Labs
  • 15% to Bored Ape/Mutant Ape owners
  • 47% to ApeCoin DAO

In mid-September, the ApeCoin DAO released 26 million ApeCoins, so investors could freely dump their bags on retailers via Coinbase. [Decrypt]

David Gerard explains exactly how VCs make millions of dollars via securities fraud: [David Gerard]

“The entire venture capital push for Web3 is so that Andreesen Horowitz (a16z) and friends can dump ill-regulated tokens on retail as fast as possible. This gives the VCs very fast liquidity events — the bit where they make money — and much faster than they get from investing in actual companies.”

ApeCoin will also be the official token of the Otherside game, supposedly to prove that ApeCoin is a decentralized utility token and not an altcoin that investors are hoping to cash out on. 

If you are wondering how all of this decentralized nonsense comes into play — Bill Hinman, when he was working for the SEC as the director of the Division of Corporation Finance, declared that ETH was not a security because it was “sufficiently decentralized.” [SEC] 

Yuga Labs is trying to model itself after Ethereum, so it can effectively say to the SEC, “You can’t sue us, bro!”

They’ve got someone good coaching them. Hinman, who has since retired from the SEC, now works for a16z. [a16z] 

Securities laws exist to prevent fraud. Companies that offer securities are subject to strict disclosure rules for this reason — to protect investors. Yuga Labs main founders Greg Solano and Wylie Aronow thought it would be great to remain CryptoGarga and GordonGoner until they were “doxxed.” [Buzzfeed] 

They were upset when Buzzfeed wrote that story, and they shamelessly brought a lot of ire from the crypto community onto the author of the piece, when their true identities were something they should have openly and responsibly disclosed from day one. 

Solano and Wylie are about to get an education in securities laws, along with the sobering realization they were never witty or clever or even lucky, just pawns in a game that VCs have been playing for years.

With celebs shilling their Bored Ape NFTs on national TV, Bored Apes Yacht Club has gotten a ridiculous amount of press. The SEC will want to make an example of Yuga Labs. I suspect, at some point, Solano and Wylie can look forward to a Wells notice from the SEC, giving them a heads up that an enforcement action is coming down the pipes.

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Posted on by Amy Castor 0

News: Crypto Mom wants to give criminals a head start, IOTA’s meltdown, Lubin’s organism divides

As a reminder, I will be traveling to Vancouver on Feb. 22 to spend about a day and a half with David Gerard. We are being interviewed for a QuadrigaCX documentary. I know when we get there, we are going to wish we had more time to hang out and meet people in the area. Especially given how far Gerard has to travel (from London) and how beautiful Vancouver is. And with that, here is the news from the past week.

Crypto Mom wants to give criminals a head start

SEC Commissioner Hester Peirce (aka “Crypto Mom”) has unveiled her proposal to create a “safe harbor” for crypto startups, allowing them a three-year grace period after their ICO to achieve a level of decentralization sufficient to pass through the agency’s securities evaluations, specifically the Howey Test. (My story in Modern Consensus.)

Where to begin? Given that most, if not all ICOs are illegal securities offerings, this is like giving fraudsters free reign, so they can pump up their coins, cash in and leave the country. It’s like 2017 all over again. This whole notion of “sufficiently decentralized” is something that first came in mid-2018 when Bill Hinman, the SEC’s director, division of corporate finance, mentioned it in a talk he was giving about Ethereum. There is no clear way of defining “sufficiently decentralized.” It’s a murky concept to begin with. (See David Gerard’s story on Peirce. He goes into more depth and is not nearly so kind.)

Peirce is a Republican with libertarian leanings. Her term expires June 5. With a proposal like this and a nickname “Crypto Mom,” I can only assume she is buttering up for her next gig? Also, the odds of this rule passing are slim to none, especially given SEC Commissioner’s Jay Clayton’s strong criticism of ICOs in the past. 

IOTA’s meltdown

IOTA is in full meltdown mode. Apparently, IOTA founders Sergey Ivancheglo (aka Come-from-Beyond) and David Sønstebø were working on a ternary computing development project called Jinn. But it fell apart, and now the two can’t stop pointing fingers at each other. Ivancheglo says that he no longer works for foundation director David Sønstebø and is suing him for 25 million MIOTA (~ $8.5 million). Sønstebø wrote this really long Medium post, which I had trouble staying awake through. There is also a r/buttcoin Reddit post that spells out the full drama, if you’re in need of entertainment.

Given the maturity level demonstrated by this project in the past, I’m not surprised by any of this. The project has been a complete mess ever since they tried to roll their own crypto in 2017. I wrote about it for Forbes, and they attacked me with weird blog posts and other nonsense. Cofounder Dominik Schiener even threatened to slap me. And when confronted, he accused me of “leading the FUD race.” FT Alphaville actually covered this in a story titled “FUD, inglorious FUD” at the time. 

Researcher Sarah Jamie Lewis is calling on some journalist somewhere to do a deep dive on this sketchy project. “At a glance it’s really hard to not come to the conclusion that there is rampant criminal fraud afoot,” she said in a Twitter thread.

Ripple perpetual swaps

Bitmex has announced trading of XRP perpetual swaps. Bitmex co-founder Arthur Hayes apparently believes XRP is lowly enough to trade on his exchange. Boo-yaka-sha!

Speaking of Ripple, XRP lost almost half of its value last year. It’s a touchy topic for Galaxy Digital CEO Mike Novogratz, because he has invested $23 million into the coin. He recently told a group of financial advisers in Orlando that XRP will “underperform immensely again this year.” He suggested it’s because Ripple owns a giant pool of the coins and keeps selling them off in a situation he likened to shares. (CoinDesk)  

The total amount of XRP in circulation is 100 billion tokens. While Ripple was “gifted” 80 billion, its holdings are down to 56 billion, most of which are in escrow. The company unlocks one billion XRP each month, sells a portion and puts the rest back in escrow. Does that sound like shares to you?

Mastercard dumps all over Libra

Mastercard was one of several payments companies (along with PayPal, eBay, Stripe, Visa, Mercado Pago) to pull out of the Libra Association in October. In an interview with the Financial Times, Mastercard’s CEO Ajay Banga revealed why.

First, Libra Association’s key members refused to commit to avoid running afoul of local KYC/AML rules. Banga would ask them to put things in writing, and they wouldn’t. Second, he didn’t understand what the game plan was for making money. “When you don’t understand how money gets made, it gets made in ways you don’t like.” Finally, the financial inclusion bit struck him as odd. “I’m like: ‘this doesn’t sound right,’” he said.

This gives us a bit of insight into the lack of thought and planning Facebook put into its Libra project before going public with it. You would think a huge enterprise like Facebook would get this stuff right, but apparently not.

ConsenSys splits in two

images (1)Joe Lubin’s organism (that’s what he used to call it, an “organism) looks to be running into more funding trouble, so it’s going to spin off its venture arm. The company will basically become two separate businesses, a software business and an investment business. In the process, it’s also  cutting another 14% of its staff. This is after cutting 13% of its staff in December. (My story in Modern Consensus.)

At one time, ConsenSys had 1,200 employees. In mid-2018, it reportedly had 900. About 117 were let go in December, and likely another 100 in this last round. This is a company that midwifed many of the ICOs that fueled the 2017-2018 crypto bubble. I can still recall going to ConsenSys’ Ethereum Summit on a sweltering day in May 2017 and watching some guy on stage strip down to his boxer shorts. Such was the exuberance at the time.

ConsenSys now lists only 65 companies in its investment portfolio. When Forbes wrote this scathing article in late 2018, the company had 200 startups. Lubin’s science experiment is starting to unravel.

Justin Sun finally breaks bread with Buffet

On Thursday, Tron CEO Justin Sun tweeted a receipt and pictures to show he finally dined with Warren Buffet. This, after paying $4.6 million in a charity auction last year to have lunch with the multi-billionaire. They were originally supposed to meet in San Francisco six months ago, but Sun postponed. This time they had dinner on Buffet’s home turf in Omaha, so Buffet clearly learned his lesson. Other guests were Litecoin’s Charlie Lee, Huobi CFO Chris Lee, eToro chief Yoni Assia, Binance Charity Foundation Head Helen Hai. The bill was for $515 and Buffet left a $100 tip. (Modern Consensus.)

Craig Wright’s abuse of privilege

Craig Wright, the self-professed creator of bitcoin, is driving the attorneys representing Ira Kleiman and the judge bananas. In a document filed with the court on Feb. 2, plaintiffs claimed that Wright has asserted privilege over 11,000 company documents. That is only part of the problem, they said. “The vague descriptions of what is being withheld makes any meaningful analysis on a document by document basis impossible.”

Wright has also apparently claimed that the” bonded courier” is an attorney and any communications with this person of mystery is privileged as well. (Modern Consensus.)

Altsbit gets hacked

Exchange hacks are extremely rare. We don’t hear about them too often, only once every few weeks or so. The latest victim is a small Italian exchange called Altsbit, which had its hot wallet vacuumed clean last week.

This was especially bad for Altsbit, because for some inexplicable reason, the exchange was keeping almost all of its funds in its hot wallet, which is a terrible idea. Most exchanges keep the majority of their funds in offline cold storage for security purposes.

According to reports, the hackers stole 1,066 Komodo (KMD) tokens and 283,375 Verus (VRSC) coins. The combined value of both stands at about $27,000. That’s small potatoes compared to other exchange hacks, where hundreds of millions worth of coins have gone missing. Almost all of Altsbit’s trading activity was coming from the ARRR/BTC pair. (ARRR is the native token of the Pirate Chain.) Altsbit said in a tweet on Feb. 5, it was investigating details of the hack and would get back to everyone soon, but so far nada. The exchange was founded in April 2018.

Bakkt gets into payments

Bakkt, the ICE-owned bitcoin options and futures exchange, isn’t making any money on bitcoin options, but that’s okay because it has another plan. It’s going into payments. The exchange is set to acquire loyalty program provider Bridge2 Solutions. The master plan is to integrate reward points, crypto, and in-game tokens into a single app, so consumers get an aggregate view of their digital assets. Eventually consumers will be able to spend those as cash via the Bakkt mobile app. But for that to happen, Bakkt will have to invest copious amounts of money into marketing to get merchants to adopt the new system of payment. (My story in Modern Consensus)

Other news

What’s happening with Jae Kwon? As Decrypt reported on Jan. 31, he stepped down as CEO of Cosmos to work on a project called Virgo with lofty aims. Cosmos pulled in $17 million in an ICO in 2017. Now Kwon is tweeting under three different monikers and the people within his company have come to find his behavior untenable. (Coindesk)

U.S. Marshalls is auctioning off $40 million of bitcoin (~4,041 BTC) on Feb. 18. (Coindesk.) If you want to put in a bid, you’ll have to deposit $200,000 in advance. Here is the registration form for anyone interested.  

Another study has come out showing that proof-of-stake is just as costly as proof-of-work. But instead of contributing to global warming, PoS requires stakers to put down tokens, lots and lots of them. It’s more evidence that blockchains aren’t economical.

If you have comments or feedback on this newsletter or a tip, drop me a line or DM me on Twitter at @ahcastor.

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Posted on by Amy Castor 0