NBA Top Shot NFTs Are ‘Plausibly’ Securities, Judge Rules in Dapper Labs Lawsuit NBA Top Shot NFTs Are ‘Plausibly’ Securities, Judge Rules in Dapper Labs Lawsuit

NBA Top Shot NFTs Are ‘Plausibly’ Securities, Judge Rules in Dapper Labs Lawsuit

Judge used the Supreme Court Howey Test to determine that the NBA collectibles platform ostensibly could be considered a security.

NBA Top Shot NFTs Are ‘Plausibly’ Securities, Judge Rules in Dapper Labs Lawsuit

Cover art/illustration via CryptoSlate

United States District Court Judge Victor Marrero has ruled in a case against Dapper Labs that NFTs associated with NBA Top Shots are likely securities.

On Feb. 22, Marrero denied Dapper’s request to dismiss the suit, stating that the NFTs offered on Dapper’s platform “plausibly” satisfy the requirements of a security.

In his ruling, Marrero cited the Howkey Test — a landmark Supreme Court Ruling to determine whether a transaction constitutes an investment contract, a type of security.

The U.S. Supreme Court established the test in the case SEC v. W.J. Howey Co. in 1946. The test has four elements that must be met for a transaction to be considered an investment contract:

  1. There is an investment of money.
  2. The investment is in a common enterprise.
  3. There is an expectation of profits from the investment.
  4. The expected profits come from the efforts of a third party or promoter.

“Courts have repeatedly found that consumer goods—including art and collectibles like basketball cards—are not securities under federal law,” a Dapper statement countered.

“We are confident the same holds true for moments and other collectibles, digital or otherwise, and look forward to vigorously defending our position in court as the case continues.”

The judge’s ruling gives credibility to the theory that networks that power Top Shot are more private than public, a ruling Dapper Labs would likely refute.

Although Dapper Labs created the Flow blockchain to support NBA Top Shot and other initiatives, the company intended it to be an open and permissionless network that has progressively decentralized its node operators. Dapper representatives claimed in late 2021 that Flow is now “controlled by the community.”

However, the judge’s ruling suggests that there is enough evidence to contradict this claim. The judge highlights Dapper’s control over the NBA Top Shot platform and the underlying intellectual property owned by the NBA and National Basketball Players Association (NBPA). The ruling also points to statements made by Dapper Labs and CEO Roham Gharegozlou regarding the market value of moments, and the potential for Top Shot NFTs to increase in value over time. Furthermore, the ruling notes that in early 2021, when NBA Top Shot was overwhelmed with user demand, NFT holders were unable to access the marketplace and sell their assets.

Judge Marreo ultimately cautioned against applying his ruling to the broader market for NFTs in general, concluding in his ruling:

“Ultimately, the Court’s conclusion that what Dapper Labs offered was an investment contract under Howey is narrow,” he wrote. “Not all NFTs offered or sold by any company will constitute a security, and each scheme must be assessed on a case-by-case basis.”

Posted In: , Legal, NFTs