Bored Ape NFTs Are Not Securities, Court Rules in Landmark Decision
News Summary
A California federal judge dismissed a class-action lawsuit against Yuga Labs, ruling that its Bored Ape Yacht Club (BAYC) NFTs are not securities. Judge Fernando M. Olguin found key differences from other NFTs plausibly deemed securities (such as Dapper Labs' NBA Top Shot), noting Bored Ape NFTs were purchased on third-party marketplaces like OpenSea, not on a marketplace controlled by the NFT issuer. Judge Olguin determined that Bored Ape NFTs failed to meet the crucial "common enterprise" prong of the Howey test. Furthermore, Yuga Labs' collection of creator royalties suggested a decoupling of fortunes between holders and the issuer, contrasting with SEC arguments during the Biden administration that creator royalties indicated an asset was a security. This ruling marks a significant legal victory for Yuga Labs, although Bored Ape NFT prices remain far below their all-time high. Earlier this year, the SEC had already closed its investigation into Yuga Labs as part of the Trump administration's pro-crypto realignment.
Background
The U.S. Securities and Exchange Commission (SEC) has long grappled with defining the legal status of crypto assets, including NFTs, particularly regarding whether they constitute securities under the U.S. Supreme Court's Howey Test. This test assesses whether a transaction involves an "investment of money," in a "common enterprise," with an "expectation of profits," and "derived solely from the efforts of others." During the Biden administration, the SEC adopted a relatively stringent stance on crypto and NFTs, classifying some NFT projects as potentially registrable securities. However, following President Trump's re-election in 2024, his administration in 2025 initiated a more aggressive "pro-crypto" policy realignment. This shift has already led the SEC to close investigations into companies like Yuga Labs, signaling a changing regulatory landscape.
In-Depth AI Insights
What are the strategic implications of this ruling for the broader NFT market and the regulatory landscape under the Trump administration? - This ruling, combined with the SEC closing its investigations into Yuga Labs and OpenSea under the Trump administration, solidifies a more lenient regulatory environment for certain NFT projects. - It establishes a precedent distinguishing NFTs sold on third-party platforms with creator royalties from those deemed securities (e.g., Dapper Labs, DraftKings) that had issuer-controlled marketplaces and potentially a clearer "common enterprise" link. - This could encourage innovation and investment in the NFT space, particularly for projects structured to avoid the "common enterprise" and "profit expectation derived solely from others' efforts" prongs of the Howey test. - However, it also creates a bifurcated market; projects with characteristics similar to Dapper Labs' or DraftKings' NFTs remain vulnerable, suggesting a need for clear structuring. How does the court's reasoning for dismissing the "common enterprise" prong of the Howey test, and its consideration of creator royalties, impact future NFT project design and secondary market liquidity? - The court's emphasis on transactions occurring on third-party marketplaces, which weakened the "common enterprise" argument, incentivizes NFT projects to avoid creating closed, issuer-controlled trading ecosystems. Open platforms and decentralized sales channels become paramount. - Creator royalties being viewed as decoupling the issuer's and holders' fortunes, contrary to the SEC's earlier arguments that royalties implied security status, may encourage projects to continue using royalty models but emphasize their financial independence from holders' specific secondary market performance. - This interpretation could stimulate secondary market activity as investors gain clarity that their profits (or losses) are more dependent on market dynamics than on the issuer's ongoing efforts, enhancing liquidity while reinforcing their status as digital collectibles rather than investment vehicles. Given Bored Ape NFTs' significant price decline, to what extent can this "non-security" ruling restore investor confidence and impact their long-term value proposition? - While the ruling provides legal clarity, Bored Ape NFT prices are down 90% from their peak, indicating a fundamental shift in market perception of their high-value investment status. Legal clarification helps remove uncertainty but does not directly address intrinsic value or utility shortfalls. - The ruling may primarily attract institutional or larger investors who were previously on the sidelines due to regulatory ambiguity, offering a clearer path into the non-security NFT market. - Long-term value will depend more on the continued development of the Yuga Labs ecosystem, brand appeal, utility, and overall market demand for digital collectibles, rather than solely on its non-security legal status. Legal clarity serves as a foundation, not a value driver.