A federal judge has ruled that the NBA-Branded ‘Top Shot Moments’ non-fungible tokens (NFTs) created by Dapper Labs may be securities.
This ruling comes a year and a half after a class-action lawsuit was filed against the company and its CEO, Roham Gharegozlu, for violating federal securities laws.
The lawsuit alleges that the company offered an NFT collection, the NBA Top Shot Moments, without registering with the U.S. Securities and Exchange Commission (SEC).
The judge, Victor Marrero of the Southern District of New York, ruled that the FLOW tokens created by Dapper Labs were “necessary to the totality of the scheme at issue,” and, while not securities themselves, could mean that the NFTs could be considered securities.
Dapper Labs filed a motion to dismiss the lawsuit in September, claiming that digital basketball cards are not securities, and lawyers for the company argued that basketball cards, Pokemon cards, and baseball cards are not securities.
However, Judge Marrero disagreed in his ruling, which denied the motion to dismiss the lawsuit. The judge looked at the prongs of the Howey Test to determine whether the NFTs were securities.
On the first prong, an investment of money, the judge found that it was “adequately pled,” noting that neither party had an objection to that prong.
On the second prong, whether there is a common enterprise, the judge looked at the definition of “pooling” of investors’ funds and pointed to precedents such as the Securities and Exchange Commission’s lawsuits against Kik Interactive and Telegram and the U.S. Department of Justice’s case against Maksim Zaslavskiy. The judge said he found that the “purchasers’ fortunes were tied to the overall success of Dapper Labs.”
The third prong, whether there is an expectation of profits, was also met, according to the judge. He said that Dapper Labs “misstated” the law in saying that there needed to be a “‘persistent’ promise of profit,” and that the plaintiffs’ allegations, including those detailed above, were adequate to support a finding that Moments were primarily purchased for an investment purpose.
The fourth and final prong of the Howey Test, the efforts of others, was also met, according to the judge.
The judge added that Dapper Labs’ failure to acknowledge the blockchain technology that underlies NBA Top Moments was fatal to their Motion. He also said that the existence of a secondary marketplace controlled by Dapper Labs supported his conclusion.
The judge said that his conclusion that what Dapper Labs offered was an investment contract under Howey was narrow and that other NFTs may not be securities.
Dapper Labs responded to the ruling, saying that it does not mean that Top Shot Moments are securities, but rather that the court has decided to allow the case to proceed to the discovery phase. The company’s legal team plans to vigorously defend itself against the allegations.
“We respectfully disagree with the court’s decision today. NBA Top Shot is not a security, and we will vigorously defend ourselves against this baseless lawsuit.”
“Today’s ruling is simply a procedural step allowing the case to proceed to discovery. We remain confident in our position and look forward to continuing to develop the NBA Top Shot experience.”Dapper Labs said in a statement.
It is likely that Dapper Labs will appeal the decision. In the meantime, it is unclear what effect this ruling will have on the NBA Top Shot Moments market. The NBA has been a strong supporter of the NFT industry, and many athletes have released their own NFT collections.
However, this ruling may cause some companies to rethink their NFT offerings and ensure that they are compliant with securities laws.
The SEC has been keeping a close eye on the NFT market and has warned investors to be wary of potential scams and fraudulent offerings. Earlier this year, the agency brought its first enforcement action against an NFT issuer, alleging that the company had misled investors about the value of its tokens.
The SEC has also been working on guidance to help companies determine whether their NFT offerings are subject to securities laws.
In a statement last year, the agency said that “depending on the facts and circumstances, the offering of an NFT may involve the offer and sale of securities.” The agency has not yet issued any formal guidance on the matter.
The case against Dapper Labs is still in the early stages, and it remains to be seen how it will play out. However, the ruling is a reminder that the NFT market is not immune from regulation and that companies must be careful in how they market and sell their offerings.
As the market continues to evolve, it is likely that we will see more legal challenges and regulatory scrutiny in the months and years ahead.
Ultimately, this ruling could have significant implications for the NFT industry, as many other companies offer similar products. The SEC has been clear that it considers some NFTs to be securities, and this ruling may encourage other lawsuits.
NFTs have grown in popularity in recent years, with some selling for millions of dollars. However, as with any new technology, there are still questions about how it fits into existing regulations.