Wednesday 28 December 2022
There is hardly anything more valuable in this world than fine art. Just ask Paul Allen, whose collection of paintings and sculptures fetched over $1.5 billion at a recent auction, including $117 million for van Gogh’s Verger avec cyprès. But as is so often the case, the financial rewards of fine art go to the collector and not to the artist. Van Gogh sold one painting in his lifetime – and it did so for well under $117 million – despite creating more than 900 works of art.
Financial success is also finding its way into the digital world. Mike Winkelmann, better known as Beeple, sold his Non-Fungible Token (“NFT”) “Everydays: The First 5000 Days” in 2021 for $69.3 million. Unfortunately, most digital artists are more like Van Gogh than Beeple—at least in terms of their financial fortunes. An April 2021 analysis of data collected by OpenSea found that more than half of NFTs sold for less than $200 before fees. So how does a digital artist generate enough demand to generate millions in sales?
According to a recent 95-page lawsuit filed in California federal court against Yuga Labs, creators of the Bored Ape Yacht Club (“BAYC”) line of NFTs, the answer is to pay celebrities to feign interest in their art. The putative class action lawsuit alleges that Yuga Labs and its promoters attempted to create the appearance of organic interest in their NFTs by paying celebrities including Jimmy Fallon, Post Malone, DJ Khaled, and Paris Hilton to purchase the NFTs and then letting them their purchases were offered by supporters, usually via social media.
Celebrities cheered their new NFTs, which sometimes sold for staggering sums, or, in the case of Madonna, lamented her inability to get her favorite monkey, reportedly giving the impression that the BAYC NFTs were “so coveted and so exclusive even a highly connected celebrity like [Madonna] couldn’t get anyone she wanted.” Meanwhile, the value of bored monkeys — and the native ApeCoin token launched in March 2022 — continued to soar.
However, plaintiffs allege that these celebrities did not join BAYC out of a genuine interest in the NFTs. As the plaintiffs report, the celebrities didn’t even buy the monkeys. Rather, Yuga Labs and its promoters compensated the celebrities for their purchases and gave a little extra for their effort.
Unfortunately for everyone involved, BAYC wasn’t immune to the market weakness that took bitcoin to $17,000 and the S&P 500 down nearly 25% in a year. A monkey Justin Bieber bought for $1.3 million is now worth just $70,000, and ApeCoin is down 90% from its all-time high. The plaintiffs’ assets fared little better, leading to the current lawsuit.
In a way, the plaintiffs allege a fairly simple wash trade scam repackaged with NFTs instead of stocks. Artificial trades create the impression that there is more desire for an asset than the market can actually support, attracting investors who will ultimately be harmed if the market ever corrects.
However, other aspects of this litigation are unique to BAYC. Part of what Yuga Labs sells is membership in an exclusive club. Owning a bored monkey can take you to a music festival and… a proper nightclub. The prominent membership in this club makes the NFTs that grant entry all the more valuable.
Advertising showing celebrities enjoying a particular product is nothing new. And bars and nightclubs have long offered coveted guests cheap deals and free products. Before social media, however, such recommendations were more transparent. Few people thought that a camera crew would accidentally stumble into Sean Connery’s house just before he poured himself a glass of Suntory whiskey (even the paparazzi have limits).
But TikTok, Instagram, Facebook, and other social media apps are particularly vulnerable to celebrity endorsements because they give the impression that the poster uses the product — or, in this case, bought the NFT — as part of their daily lives. For this reason, the Federal Trade Commission has cracked down on social media influencers who fail to disclose financial ties to the products in their posts in recent years.
The SEC has also targeted prominent promoters of digital assets. In October, Kim Kardashian paid $1.26 million to settle claims that she used social media to promote EthereumMax without disclosing her financial interest in the cryptocurrency. The SEC’s settlement announcement reiterated its November 2017 policy that “any celebrity or other person promoting a crypto-asset security product must disclose the nature, source, and amount of compensation they will receive in exchange for promotion.” to have”.
Congressmen are not immune to scrutiny either. On December 1, the U.S. House Ethics Committee fined outgoing Rep. Madison Cawthorn (R-NC) approximately $15,000 for promoting the Let’s Go Brandon Coin despite confirming his purchase of $150,000. Dollars of cryptocurrency had not disclosed.
Time will tell if plaintiffs’ claims against Yuga Labs will stand. What is clear, however, is that the decline in the crypto market over the past year has put crypto developers and their backers under scrutiny.
Copyright ©2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XII, Number 362
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