The lawsuit alleges celebrities including Paris Hilton, Jimmy Fallon, Tom Brady and U2 manager Guy Oseary staged BAYC purchases to drum up demand for the NFTs

A recent securities class action lawsuit filed in a California district court against Yuga Labs, the makers of the Bored Ape Yacht Club non-fungible tokens (NFTs), may face tough legal hurdles in the plaintiffs’ attempts to get a ruling in the area of securities fraud, according to an intellectual property lawyer.

Brian Frye, who teaches law at the University of Kentucky, said that there are unknowns about this lawsuit and even if it goes forward it would not necessarily clear up questions about whether NFTs are securities.

“The key issue will be convincing the court that this is a securities fraud claim, given the lack of guidance from the SEC about both crypto & especially NFTs,” Frye said to me this week. A ruling at this level of the court system may not count for much either, Frye said. “District court rulings aren't binding precedent on other courts,” he said. “It would have to go to a circuit court to create a binding precedent.”

The plaintiffs in the case are Adam Titcher and Adonis Real. Titcher, a California resident, bought a Mutant Ape Yacht Club NFT and other Yuga-associated digital assets while Real, a Florida resident, bought ApeCoin tokens, according to the filing.

The lawsuit alleges that Yuga Labs founders used crypto services company MoonPay and celebrity influencers to illegally sell BAYC NFTs and used an Ethereum-based token, ApeCoin, to boost sales of Yuga assets, defrauding thousands of holders by artificially boosting their market valuations. It names dozens of celebrities, including Paris Hilton, Jimmy Fallon and Tom Brady, but focuses most of its allegations on former rock band U2 manager and Madonna minder Guy Oseary.

The suit alleges Oseary acted as a marketing kingpin in efforts to sell Yuga Labs NFTs and the staking coin ApeCoin to over 100,000 accounts holding Yuga assets. On December 14, 2022 there were more than 103,000 unique account holders of Yuga securities.

“In our view, these claims are opportunistic and parasitic. We strongly believe that they are without merit, and look forward to proving as much,” a Yuga Labs spokesman said in an e-mailed statement. Oseary didn’t respond to a request for comment.

Beeple’s Everydays: The First 5000 Days

The University of Kentucky’s Frye said the suit must satisfy two requirements to move forward.

“There are two big hurdles in a securities class-action lawsuit,” he said. “The plaintiff has to show that they are pleading a viable claim and also that the class should be certified. If you fail on either front, the action is dead in the water.” While there are “potential issues on both fronts” Frye said certification of the class action “is maybe an easier lift.”

Earlier this year, the SEC started an investigation of Yuga Labs. The SEC’s public position is that staking tokens and NFTs that are sold to the public without disclosures of their backing or financial incentives for their supporters make them securities.

Regulatory sensitivity about such issues is becoming more prominent outside of the U.S.

Hong Kong regulators on December 7 adopted an amended bill call the AML and Anti-Terrorist Financing Bill 2022 making it explicitly clear that in 2023 companies that engage in the creation of NFTs and crypto asset services will need to register with the territory’s Securities and Finance Commission.

Animoca Brands, Yuga Labs partner in the release of BAYC and Yuga NFTs, has not returned requests for comment about whether it would be registering to the SFC for the purposes of engaging in this practice.

Read more: Hong Kong Passes Crypto Law Requiring Firms to Register as City Races With Singapore, Korea and Japan

The recent Yuga lawsuit alleges that in October 2021 Oseary was brought in by Yuga’s founders to “actively recruit the Promoter Defendants to solicit sales of the BAYC NFTs and other Yuga Financial Products.”

The lawsuit alleges that the majority of the celebrities used to promote BAYC through public appearances on TV, among other things, were arranged by Oseary and his companies through a relationship with NFT buying service MoonPay.

“Oseary saw an opportunity to profit from using his celebrity contacts to promote the sale of Yuga securities, and he took it,” according to the suit. “Oseary used NFT artist and business partner Defendant Mike “Beeple” Winkelmann to facilitate a meeting with Yuga and the Executive Defendants, so that Oseary could pitch his plan to promote Yuga and the BAYC NFT collection.”

Winkelmann, known as Beeple in the NFT art world, is credited with kicking off the NFT mania in early 2021 when he sold his Everydays: The First 5,000 Days NFT for $69 million in March of that year.  

Specific to MoonPay, the lawsuit alleges that Oseary’s financial incentives working with MoonPay led him and others to use the service as a front to hype the BAYC brand. Many of the artists that Oseary manages are also investors in MoonPay who are also defendants in the lawsuit filed by the law firm Scott and Scott.

The SEC has not responded to requests for comment on this lawsuit. The SEC has said in the past that such activity is considered fraudulent and it has also warned that tokens such as ApeCoin and the BAYC NFTs could be considered securities, if the primary purpose of the tokens is to seek yield or to benefit financially from their promotion.

The lawsuit details ways in which Yuga Labs, Oseary and MoonPay worked with celebrities to promote the BAYC NFT brand. It alleges that BAYC purchasing interactions were staged and managed by Oseary to make it look like Jimmy Fallon, Post Malone, Paris Hilton and Gwenyth Paltrow were organically buying Bored Ape NFTs, when in fact, the lawsuit alleges, they were being paid through MoonPay over $1 million each to promote the NFTs that were given to them.

The SEC is currently investigating Yuga Labs related to this issue.