Federal judge rules NBA-branded “Top Shot Moments” NFTs from Dapper Labs could be considered securities. According to the judge, the conclusion that Dapper Labs’ offering was an investment contract under Howey is limited in scope.
A class-action lawsuit was filed against Dapper Labs and its CEO, Roham Gharegozlu, in New York over a year and a half ago, alleging that they violated federal securities laws by offering NBA Top Shot Moments, a non-fungible token (NFT) collection, without registering with the U.S. Securities and Exchange Commission (SEC).
The ruling on the motion to dismiss the case was made by District Judge Victor Marrero of the Southern District of New York, who stated that the allegations made by the plaintiffs satisfy each aspect of the Howey Test and therefore can move forward. The Howey Test is a standard used by the U.S. Supreme Court to determine whether certain transactions are considered “investment contracts.
“You can read more about Howey Test in our educational section – Here“
The Court has ruled that the allegations presented by the plaintiffs make each of the factors outlined in the Howey test appear plausible and are enough to sustain the alleged violation of Sections 5 and 12 of the Securities Act. The economic realities surrounding the case bolster the Court’s finding that the allegations made by the plaintiffs are adequate at this point. In summary, the plaintiffs have provided sufficient evidence to suggest that the NFT, Moments, offered by Dapper Labs was an “investment contract” and therefore a “security” that needed to be registered with the SEC. However, it should be noted that the case is still ongoing and subject to further developments.
“Basketball cards are not securities. Pokemon cards are not securities. Baseball cards are not securities. Common sense says so. The law says so. And courts say so,” lawyers from Dapper Labs.
In addition, the judge concluded that although Dapper Labs’ FLOW tokens are not securities on their own, they play a crucial role in the entire arrangement.
“Plaintiffs have alleged that, without FLOW tokens, no transactions on the Flow Blockchain can be validated. Indeed, the ‘Proof-of-Stake’ mechanism employed by the Flow Blockchain requires FLOW to power it and incentivize miners to validate transactions. In that respect, FLOW’s utility creates value for Moments through the network’s consensus as to ownership and the price of each transaction,” the judge said in the ruling.
The Court’s decision rests heavily on the accusation that Dapper Labs developed and controls a private blockchain. By confining the trade of Moments solely to the Flow Blockchain, whose value is linked to Moments, buyers are forced to trust Dapper Labs’ knowledge and managerial abilities, as well as its ongoing prosperity and existence. It should be noted that the case is far from being resolved.
Conclusion
Regulators in the US have been going heavily after crypto companies and celebrities post FTX collapse. At this point many companies are planning to move out of US, so that they can work towards building a product and not having to spend time dealing with uncertain regulations. You can read more about it here
In this case, despite the judge’s decision to side with the SEC on the filing, the legal dispute involving Dapper Labs is still ongoing and far from being resolved. The recent order merely rejected Dapper Labs’ motion to dismiss, and it is not a final verdict in the case. Stephanie Martin, a spokesperson for Dapper Labs, stated that “Courts have repeatedly found that consumer goods – including art and collectibles like basketball cards – are not securities under federal law.”
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