- NBA Top Shot one of the most successful NFT ventures
- Filing argued digital collectibles were in fact unregulated securities
- Judge says each NFT venture should be assessed on ‘case-by-case’ basis
Blockchain specialist Dapper Labs is facing a lawsuit that claims its video-based digital collectibles, including National Basketball Association (NBA) Top Shot, are unregistered securities rather than fan products.
NBA Top Shot lets basketball fans buy, trade and collect basketball highlights in the form of non-fungible tokens (NFTs). These collectibles are positioned as a digital version of traditional trading cards – items which have utility the owner but can also increase in value depending on real life events.
However a filing in 2021 alleged that NBA Top Shot was in fact selling securities, and that Dapper Labs had harmed buyers by failing to register them with the Securities and Exchange Commission (SEC).
The plaintiffs also argued that Dapper Labs had made hundreds of millions of dollars by propping up the market, and the value of its Flow token, by preventing users from withdrawing money from their accounts. Furthermore, it is claimed that Dapper Labs publicised high value sales and did not prevent their users from referring to their purchases as investments.
Accordingly, the plaintiffs are seeking damages on the basis that all of these alleged factors encouraged consumers to part with their cash despite the risk of financial loss.
Nearly two years on and a judge in New York has denied requests from Dapper Labs for the case to be dismissed. United States District Court Judge Victor Marrero said the Top Shot platform met the stipulations of a security and that the company and its chief executive Roham Gharegozlou have a case to answer.
“Importantly, today’s order – which the court described as a ‘close call’ – only denied the defendants’ motion to dismiss the complaint at the pleading stage of the case,” a Dapper Labs spokesperson told The Verge.
“It did not conclude the plaintiffs were right, and it is not a final ruling on the merits of the case. Courts have repeatedly found that consumer goods – including art and collectibles like basketball cards – are not securities under federal law. 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.”
SportsPro says…
One of the biggest criticisms of NFTs is that they are items of mere speculation or even a quick rich scheme designed to entice consumers with the promise of financial gain but ultimately reward those who sell at the peak of an inflated market.
Many initiatives within the sports industry have sought to distance themselves from such accusations, emphasising their utility. While these token-based products can still be bought and sold like physical goods, the suggestion is that the value is tied to this utility and not as a result of stock market-like dynamics.
NBA Top Shot and similar ventures argue users receive the same utility as they would do with trading cards or football stickers and that their value is purely incidental and not their raison d’etre. Dapper Labs will now have to prove that in court or settle with the plaintiffs.
Superficially, the ruling could have implications for other NFT projects. However Marrero did add an important caveat that his decision only applied to Dapper Labs: ‘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.’
