The creator of NBA Top Shot NFTs is facing a lawsuit for selling unregistered securities, according to a decision by a US judge. This landmark ruling could have significant implications for the future of non-fungible tokens (NFTs) and their regulation.
In a lawsuit filed in 2021, buyers of Top Shot Moments, which are digital recordings of noteworthy moments from NBA basketball games, have accused Dapper Labs of violating US securities regulations. The company allegedly offered Top Shot NFTs without registering them with the appropriate regulatory bodies. The plaintiffs also claim that Dapper Labs abused its power over these coveted collectibles. The case will now proceed to the next phase.
What are NBA Top Shot NFTs?
NBA Top Shot NFTs are digital collectibles created and sold by the National Basketball Association (NBA) in collaboration with Dapper Labs. Each Top Shot NFT showcases a unique moment from a basketball game, such as a slam dunk or a game-winning shot. The in-house marketplace allows collectors to buy, sell, and trade these digital collectibles, creating a vibrant secondary market.
Launched in 2020, the collection quickly became a sensation as the first of its kind. The NFT project developed by Dapper Labs has generated over $1 billion in trading volume since its inception, a milestone achieved by only six other collections to date. A potential classification as a security could therefore have implications for leading NFT issuers.
Claim will not be dismissed
Dapper Labs had requested the dismissal of the lawsuit prior to the trial; however, US District Judge Victor Marrero denied this request. According to the judge, the plaintiff's argument that Top Shot NFTs are securities is sufficient for the proceedings to continue. Marrero also noted that the trade of Top Shot Moments is limited to Dapper's blockchain "Flow", making buyers dependent on Dapper's expertise, management, and continuity.
"Hypothetically, if Upper Deck or Topps, two longtime producers of physical sports trading cards, were to go out of business, the value of the cards they sold would be wholly unaffected, and may even increase, much like posthumously discovered art. That is not true here, where plaintiffs allege that the pooling of capital generated from the sale of Moments propped up the Flow Blockchain and where the value of Moments is intertwined with the success of that blockchain and Dapper Labs." - U.S. District Judge Victor Marrero
This would fulfill the requirements for the Howey Test, a legal standard used to determine whether a transaction constitutes an investment contract and thus a security. In this case, the plaintiffs argue that NBA Top Shot NFTs should be considered securities because buyers invest in them with the expectation of profit and rely on Dapper Labs' management and expertise to increase the value of their investment. The district judge's decision is by no means final and only signifies the continuation of the legal process.
