There is little in this world more precious than art. Just ask Paul Allen, whose collection of paintings and sculptures recently sold at auction for more than $1.5 billion, including $117 million for van Gogh’s “Verger avec cyprès.” But, as so often, the rewards fine arts finances go to the collector, not the artist. Van Gogh sold one painting in his lifetime, and for far less than $117 million, despite the fact that he produced more than 900 works of art.
Financial success has started to arrive in the digital world as well. Mike Winkelmann, better known as Beeple, sold his non-fungible token (“NFT”) ‘Everydays: The First 5000 Days’ for $69.3 million in 2021. Unfortunately, most digital artists are more like van Gogh than to Beeple, at least as regards their financial fortunes. An April 2021 analysis of data collected by OpenSea found that more than half of NFTs were sold for less than $200 before tax. So how does a digital artist generate enough demand to create million dollar sales?
According to a recent 95-page lawsuit filed in California federal court against Yuga Labs, makers of the Bored Ape Yacht Club (“BAYC”) line of NFTs, the answer is to pay celebrities to feign interest in your art. The alleged class-action lawsuit alleges that Yuga Labs and their promoters attempted to create the impression of organic interest in their NFTs by paying celebrities such as Jimmy Fallon, Post Malone, DJ Khaled and Paris Hilton to buy the NFTs and then touting their purchases to their supporters, usually via social media.
Celebrities have raved about their new NFTs, sometimes purchased for eye-popping sums, or, in Madonna’s case, bemoaned their inability to get their favorite monkey, presumably creating the impression that BAYC NFTs “were so in demand and so exclusive that even a very connected celebrity like [Madonna] he could not get any of what he wanted. Meanwhile, the value of the bored monkeys and the native ApeCoin token launched in March 2022 has soared higher and higher.
But, the plaintiffs argue, these celebrities didn’t join BAYC out of a genuine interest in NFTs. As the plaintiffs recount, the celebrities didn’t even buy the monkeys. Rather, Yuga Labs and their promoters compensated celebrities for their purchases and added a little extra for their problems.
Unfortunately for all involved, BAYC has not been immune from the market malaise that has seen Bitcoin drop to $17,000 and the S&P 500 drop nearly 25% in one year. A monkey that Justin Bieber bought for $1.3 million is now worth a measly $70,000, and ApeCoin is 90% off its all-time high. The plaintiffs’ businesses have fared slightly better, leading to the current lawsuit.
In one sense, the plaintiffs are alleging a fairly straightforward wash trading scam repackaged with NFTs rather than stocks. Artificial trades create the impression that there is more desire for an asset than the market can actually support, attracting investors who are ultimately hurt if the market ever corrects.
But other aspects of this litigation are unique to BAYC. Part of what Yuga Labs sells is exclusive club membership. Ownership of a bored monkey can get you into a music festival and… a real nightclub. Celebrity memberships in that club make NFTs that grant admission all the more valuable.
Advertisements featuring celebrities liking a particular product are nothing new. And bars and nightclubs have long provided desirable patrons with good deals and free products. However, before social media, those endorsements were more transparent. Few people thought a camera crew stumbled upon Sean Connery’s home just before he poured himself a glass of Suntory whiskey (even the paparazzi have their limits).
But TikTok, Instagram, Facebook, and other social media apps are particularly susceptible to celebrity advertising because they create the impression that the poster uses the product, or in this case, has purchased the NFT, as part of their daily life. For this reason, the Federal Trade Commission has cracked down on social media influencers in recent years who fail to disclose financial links to products in their posts.
The SEC has also targeted celebrities promoting digital assets. In October, Kim Kardashian paid $1.26 million to settle claims that she had used social media to promote EthereumMax without disclosing her financial interest in the cryptocurrency. The announcement of the settlement by the SEC reiterated its November 2017 guidance that “any celebrity or other individual promoting a cryptocurrency security must disclose the nature, source, and amount of compensation received in exchange for the promotion “.
Nor are members of Congress immune to scrutiny. On Dec. 1, the U.S. House of Representatives Ethics Committee fined outgoing Representative Madison Cawthorn (R-NC) approximately $15,000 for promoting the Let’s Go Brandon coin despite failing to disclose her $150,000 purchase of the cryptocurrency.
Time will tell if the plaintiffs’ claims against Yuga Labs have any basis. But what is clear is that last year’s downturn in the cryptocurrency market has caught the attention of cryptocurrency developers and their promoters.