There is little in this world more valuable than fine art. Just ask Paul Allen, whose collection of paintings and sculptures recently sold more than $1.5 billion at auction, including $117 million for van Gogh’s “Verger avec cyprès.” But, as is often the case, the financial rewards of fine art go to the collector, not the artist. Van Gogh sold one painting in his lifetime, and for much less than $117 million, despite having produced more than 900 works of art.
Financial success has also started to trickle down to the digital world. 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 similar to Van Gogh than Beeple, at least when it comes to their financial fortunes. An analysis of April 2021 of data collected from 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 create million-dollar sales?
According to a recent 95 page demand filed in California federal court against Yuga Labs, creators of the NFT Bored Ape Yacht Club (“BAYC”) line, the answer is paying celebrities to feign interest in their art. The alleged class action lawsuit alleges that Yuga Labs and its promoters attempted to create the impression of organic interest in its NFTs by paying celebrities such as Jimmy Fallon, Post Malone, DJ Khaled, and Paris Hilton to purchase the NFTs and then promoting their purchases to their supporters, Usually through social media.
Celebrities lauded their new NFTs, sometimes purchased for staggering sums, or, in Madonna’s case, lamented her inability to get her hands on her preferred ape, reportedly giving the impression that BAYC NFTs “were in such high demand and so exclusive.” that even a highly connected celebrity like [Madonna] she couldn’t get any of the ones she wanted.” Meanwhile, the value of the bored apes, and the native ApeCoin token launched in March 2022, went higher and higher.
But, the plaintiffs allege, these celebrities did not join BAYC out of a genuine interest in NFTs. As the plaintiffs say, the celebrities didn’t even buy the apes. Rather, Yuga Labs and its promoters compensated celebrities for their purchases and gave them a little more for their troubles.
Unfortunately for everyone involved, BAYC was not immune to market malaise that sent Bitcoin tumbling to $17,000 and the S&P 500 tumbling nearly 25% in one year. An ape Justin Bieber bought for $1.3 million is now worth $70,000 and ApeCoin is 90% below its all-time high. The plaintiffs’ assets have fared slightly better, leading to the current lawsuit.
Somehow, the plaintiffs allege a fairly basic laundering business scam repackaged with NFTs instead of stock. Artificial trades create the impression that there is more desire for an asset than the market can really support, attracting investors who will ultimately be hurt if the market ever corrects.
But other aspects of this litigation are unique to BAYC. Part of what Yuga Labs sells is membership to an exclusive club. Ownership of a bored ape can land you in a Music festival and a royal night club. Celebrity membership in that club makes admission-granting NFTs even more valuable.
Ads featuring celebrities enjoying a particular product are nothing new. And bars and nightclubs have long provided desirable customers with favorable offers and free goods. However, before social media, such endorsements were more transparent. Few people thought that a camera crew wandered into Sean Connery’s house just before he was about to pour himself a glass of Suntory whiskey (even paparazzi have limits).
But TikTok, Instagram, Facebook, and other social media apps are particularly susceptible to celebrity advertising because they create the impression that the cartel uses the product, or in this case, bought the NFT, as part of their daily lives. For this reason, the Federal Trade Commission has repressed in recent years about social media influencers not disclosing financial connections to the products in their posts.
The SEC has also targeted famous promoters of digital assets. In October, Kim Kardashian paid $1.26 million to resolve claims that he had used social media to promote EthereumMax without disclosing his financial interest in the cryptocurrency. The SEC’s announcement of the settlement reiterated its November 2017 Guide that “any celebrity or other person promoting a crypto asset must disclose the nature, source and amount of compensation received in exchange for the promotion.”
Congressmen are not immune to scrutiny either. On December 1, the Ethics Committee of the US House of Representatives. fined Outgoing representative Madison Cawthorn (R-NC) approximately $15,000 for promoting Let’s Go Brandon Coin despite not disclosing her purchase of $150,000 of the cryptocurrency.
Time will tell whether the Plaintiffs’ claims against Yuga Labs have merit. But what is clear is that last year’s downturn in the cryptocurrency market has drawn scrutiny from cryptocurrency developers and their promoters.