Home » Judge Rules Dapper Labs’ NBA ‘Top Shot Moments’ NFTs May Qualify As Securities

Judge Rules Dapper Labs’ NBA ‘Top Shot Moments’ NFTs May Qualify As Securities

Table of Contents

nba top shot

A federal judge ruled on Wednesday that offering “Top Shot” non-fungible tokens with NBA branding by Dapper Labs may constitute the sale of securities.

A class-action complaint against Dapper Labs and its CEO, Roham Gharegozlu, was filed in New York 18 months before the motion to dismiss ruling. By offering a non-fungible token (NFT) collection without first registering with the SEC, Dapper Labs and Gharegozlu are accused of breaking federal securities laws (SEC).

The Court finds that Plaintiffs’ allegations establish each factor under Howey facially plausible and survive Defendants’ Motion to Dismiss the claimed violation of Sections 5 and 12 of the Securities Act,” said Southern District of New York Judge Victor Marrero. The judge used the U.S. Supreme Court’s Howey Test to evaluate if transactions are “investment contracts.”

According to the ruling, although the FLOW tokens issued by Dapper Labs are not securities in and of themselves, they are essential to the overall scheme at issue. The judge said the plaintiffs argued that FLOW tokens validate Flow Blockchain transactions. “Proof-of-Stake” powers the Flow Blockchain and incentivizes miners to validate transactions. Moments benefits from FLOW’s consensus on ownership and transaction prices.

In September, Dapper Labs filed a motion to dismiss the lawsuit, arguing that its collection of digital basketball cards does not constitute securities.

Lawyers representing Dapper Labs argued that basketball cards, Pokemon cards, and baseball cards are not securities, as common sense and the law indicate, and courts have also ruled.

Judge Marrero disagreed, denying Dapper Labs’ motion to dismiss the lawsuit in his Wednesday ruling.  In the decision, the judge outlined the components of the Howey Test.  The judge determined that the first element, an investment of money, was “adequately pled” and noted that neither party objected.

The judge assessed the second criterion, whether there is a common enterprise, by scrutinizing the meaning of pooling investors’ funds. The judge referred to previous cases, such as the Securities and Exchange Commission lawsuits against Kik Interactive and Telegram and the U.S. Department of Justice case against Maksim Zaslavskiy.

The judge wrote that they were convinced that the plaintiff’s complaint had enough allegations of pooling to survive the Motion to Dismiss. Marrero added that “purchasers’ fortunes were tied to Dapper Labs’ overall success” because Dapper Labs controlled the Flow Blockchain and the online marketplace where Moments were sold and traded.

Additionally, the judge referenced the plaintiffs’ assertions that Dapper Labs kept funds from the sale of Moments for fundraising and preserving the value of FLOW tokens. According to the judge, “the reasonable inference to draw from these allegations” is that Dapper Labs utilizes the capital it raises by offering Moments to develop and maintain the Flow Blockchain.

He wrote that additional factors support the judge’s conclusion. On the third criterion, whether there is an expectation of profits, the judge ruled that Dapper Labs “misrepresented” the law by asserting that there must be a “‘persistent’ promise of profit,” which appeals courts have ruled is not necessary.

The court concluded that the Court believes that the Defendants’ public comments and marketing materials encouraged consumers to anticipate profits objectively. The judge supported this statement with evidence, such as screenshots of Top Shot tweets.

The judge stated, “Plaintiffs’ allegations, including those previously mentioned, are sufficient to support the conclusion that Moments were primarily purchased for investment purposes,” emphasizing the investment nature of the purchases made by the plaintiffs.

According to the judge, the Howey Test’s final requirement, others’ efforts, also seems to be satisfied. The judge stated that Moments’ worth is possibly mainly derived from Dapper Labs’ continuous operation of the Flow Blockchain, which allows for price transparency and enables buyers to trade. The judge further explained that the defendants’ neglect to recognize the blockchain technology underlying Moments undermines their Motion.

According to the judge, the existence of a secondary market controlled by Dapper Labs also supports his conclusion. According to the judge, the allegations regarding Dapper Labs’ creation and maintenance of a private blockchain are crucial to the court’s decision. By keeping the blockchain on which Moments’ value depends private and restricting Moments trading to the Flow Blockchain, purchasers must depend on Dapper Labs’ skills and management efforts and the company’s ongoing success and survival.

According to the judge, the conclusion that Dapper Labs’ offering of Moments was an investment contract under Howey is specific and may not apply to other NFTs. He explained that the particular scheme by which Dapper Labs offered Moments created a legal relationship between investors and promoters, making it an investment contract and a security under Howey. He added that the plaintiffs provided sufficient evidence to support their claim that Dapper Labs’ offer of Moments was an offer of an investment contract and, therefore, security that needed to be registered with the SEC.

Dapper Labs now has three weeks to file a response to the lawsuit.

Jay Solano

Jay Solano

Jay is a crypto and NFT enthusiast dedicated to exploring the dynamic world of digital assets. As a leading crypto blog writer, he relishes sharing his knowledge on the latest trends, breakthroughs, and investment opportunities in the blockchain world.

Table of Contents