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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Bored Ape Yacht Club: Unanswered Questions

I’m working on a chapter on Bored Ape Yacht Club for the NFT book that David Gerard and I are painfully slogging away on. It’s like dredging through a swamp full of stupid.  

Anyway, I’ve come across a series of unanswered questions that I need help answering. If you know anything, my DMs are open. I will update this document accordingly if I come up with more unanswered questions — which I’m sure I will. 

Why do we know so little about Yuga Labs’ founders? 

I can find almost nothing on Yuga Labs’ core founders, Wylie Aronow and Greg Solano, who operate under the pseudonyms Gordon Goner and Gargamel. 

Wylie Aronow and Greg Solano, founders of Yuga Labs

How is it these two have made it into their 30s with almost no Web presence? It just doesn’t make sense — unless, they never held down real jobs before. 

Their LinkedIn profiles, here and here, are blank.  

Most of what we do know about them comes from an interview they did with Rolling Stone, in an article published on November 1. This three months before Buzzfeed revealed their real names. (They weren’t doxxed; their names were clearly listed on public business records.)

Both grew up in Miami. They claim they met in a dive bar in their 20s and bonded over a heated discussion on David Foster Wallace. Apparently, they are somewhat literary, so this is likely true. 

While he was living in Chicago for a stint, Aronow was featured in the Chicago Tribune’s “Readers of the Week” in November 2014. 

Solano has some poetry reviews on ZYZZYVA, circa 2013 and 2014, but that’s all I can find on the two in terms of their literary obsessions.  

In the Rolling Stone interview, Aronow refers to his “gambling problem days,” and says he was a high-school dropout. He admits he never had a real job.  

On the other hand, Solano claims he did go to college and grad school. He previously worked as a writer and editor. His roommate from college was mining bitcoin in 2010, he said. 

Aronow and Solano became crypto traders during the crypto bubble/ICO period of 2017. 

If Solano went to college, where did he earn his degree? Where did he go to grad school? Inquiring minds want to know. 

Were the pair involved in any earlier crypto projects, like maybe a token offering? If so, did they use other pseudonyms?

What about Yuga Labs’ other two founders? 

Aronow and Solano hired two developers — Sass and Emperor Tomato Ketchup — who were also part of the founding team.

The two software engineers “doxxed” themselves in early February right after the Buzzfeed story came out on Aronow and Solano. They revealed their first names — Zeshan and Kerem — but not their surnames.  

Their full names are Zeshan Ali and Karem Atalay, as listed on Form D filed with the Security and Exchange Commission on March 22. 

Form D is a notice of an exempt offering of securities. These filings are specifically for the purpose of fully informing the public. Aronow and Solano’s names are also on the Form.   

The filing was so Yuga could sell shares in the company to accredited investors, such as A16z, and raise $450 million. It’s not clear that these shares were related to Apecoin.*  

Who did Aronow and Solano know? Early connections? 

Bored Ape Yacht Club has followed what appears to be a planned and well-strategized trajectory from launching an NFT project to getting a fungible token (APE) listed on Coinbase.  

The key to NFT collections is keeping holders holding, so they don’t sell their NFTs and go off to invest in other NFT collections, of which there are many. You want to keep the floor price up. 

This is usually done by airdropping holders more NFTs, which they can flip on OpenSea, and inviting them to networking events, where they can pitch their own NFT projects, etc.  

In their Rolling Stone interview, Aronow and Solano used words like “Web3” and “metaverse” and spoke about giving their NFTs real-world utility. This is investor speak. 

I suspect Solano and Aronow knew someone who advised them early on. What connections did they have? Who did they speak to before launching their project?

How are celebrities acquiring Bored Ape NFTs? 

Bored Ape Yacht Club has benefited from a number of high-profile celebrity endorsements. 

Celebs have been buying up Bored Ape NFTs, announcing their purchases on social media, and switching their Twitter profile pics to Bored Apes. 

Eminem, Jimmy Fallon, Stephen Curry, Post Malone, Lil Baby, Paris Hilton, and Madonna currently own Bored Ape NFTs, along with about a dozen other Hollywood influencers. 

Did these celebs pay full price for their Bored Apes? Is someone gifting NFTs to them for the purpose of promoting the project? 

Crypto payments company Moonpay has played a role in onboarding many celebs. Who is sending Moonpay ETH or cash to buy the BAYC NFTs?

The Federal Trade Commission has social media guidelines for influencers. If you endorse a product through social media, you have to make it obvious that you have a material connection with the brand. How is Yuga Labs getting around this? 

*Update, April 27: In an earlier version of this story, I said the Form D was related to distribution of Apecoin. It could just be equity in the company.

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