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U.S. judge ruled that NBA Top Shot NFTs are “plausibly” securities

U.S. judge ruled that NBA Top Shot NFTs are plausibly securities

Is it possible that NBA Top Shot NFT events are unregistered securities? That’s what a 2021 lawsuit filed against Top Shot creator Dapper Labs alleges, and the judge appears to agree.

Judge Victor Marrero of the United States District Court denied Dapper’s request to dismiss the lawsuit, writing that the NFTs offered on Dapper’s platform indeed appear to satisfy the requirements of a security.

In his decision, Marrero used the Howey Test, which is based on a famous U.S. Supreme Court case, to say that the NBA Top Shot NFT collectibles platform could meet the requirements of a security. Consequently, the case will proceed and Dapper Labs must stand trial.

“Importantly, today’s order only denied the defendants’ motion to dismiss the complaint. It did not conclude the plaintiffs were right, and it is not a final ruling on the merits of the case,” the spokesperson wrote.

“Courts have repeatedly found that consumer goods—including art and collectibles like basketball cards are not securities under federal law,” Dapper’s statement continues. “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 decision suggests that the plaintiff’s arguments are valid, in part because he describes the Flow blockchain, which powers Top Shot and other NFT projects and platforms, a “private” network instead of a “public” network like the Bitcoin blockchain.

However, Dapper Labs would presumably disagree with this assertion. The company created the Flow blockchain to support NBA Top Shot and other initiatives, but it is intended to be an open and permissionless network whose pool of node operators has become increasingly decentralized. Late in 2021, Dapper representatives said that “the community” now has control over Flow.

The judge believes there’s enough evidence to suggest otherwise, and also points out that Dapper has control over the NBA Top Shot platform itself and that the NBA and National Basketball Players Association have control over the IP that’s at the heart of the game.

The judge believes there is ample evidence to suggest otherwise, and further points to Dapper’s control over the NBA Top Shot platform itself, as well as NBA and National Basketball Players Association control over the underlying IP.

The decision also mentions what Dapper Labs and CEO Roham Gharegozlou have said about the market value of moments and the possibility that Top Shot NFTs will keep their value or even increase it over time. It also notes that in early 2021, when NBA Top Shot buckled under the stress of user demand, that NFT holders could not access the marketplace and sell their owned assets.

“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.”

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