Dapper Labs’ NBA-branded “Top Shot” NFT product may be a security, a federal judge ruled Wednesday.
The ruling on the dismissal petition comes a year and a half after New York filed a class-action lawsuit against Dapper Labs and its CEO, Roham Gharegozlu. The lawsuit accuses Gharegozlu and Dapper Labs of violating federal securities laws by offering a series of NFTs — NBA Top Shot Moments — without first registering with the U.S. Securities and Exchange Commission (SEC).
“The Court finds that Plaintiff’s allegations render each of Howey’s considerations substantively reasonable, and that Defendant’s motion to deny allegations of violations of Sections 5 and 12 of the Act of Evidence exists. Securities,” New York South District Judge Victor Marrero , ruling.
The Howey test the judge referred to was created by the U.S. Supreme Court to determine whether certain transactions qualify as “investment contracts.”
According to the ruling, Dapper Labs’ FLOW tokens — while not necessarily securities — are “necessary for the entire related scheme.”
“The plaintiff claims that without FLOW tokens, no transactions on the Flow blockchain can be verified. In fact, the “proof-of-stake” mechanism used by the Flow blockchain requires FLOW to power it and incentivize miners to verify transactions. In this On the one hand, the utility of FLOW creates value for Moments by creating consensus across the network on the ownership and price of each transaction,” the judge said.
Dapper Labs filed a motion to dismiss the lawsuit in September, arguing that its digital collection of basketball cards is not a security.
“Basketball cards are not securities. Pokemon cards are not stocked. Baseball cards are not securities. Common sense says so. That’s the law. Courts say so,” argued Dapper Labs’ lawyers.
However, Judge Marrero dissented in Wednesday’s ruling, denying Dapper Labs’ motion to dismiss the case.
In the ruling, the judge reviewed aspects of the Howey test.
The judge said he found the first aspect, the monetary investment, to be “fully committed,” noting that neither party objected to this aspect.
On the second aspect, the existence of a joint venture, the judge looked at the definition of “aggregation” of investor funds and pointed to the SEC’s lawsuit against Kik Interactive and Telegram, and the DOJ’s lawsuit against Kik Interactive and Telegram, among others precedent. Maxim Zaslavsky.
“The court is satisfied that plaintiffs’ complaint reasonably alleges pooled funds in the motion to dismiss,” the judge wrote.
Marrero added that “the fate of the buyer is tied to the overall success of Dapper Labs,” as Dapper Labs controls the Flow blockchain and the online marketplace where Moments is sold and traded.
The judge also pointed to the plaintiff’s claim that Dapper Labs withheld funds from the Moments sale for the purpose of fundraising and maintaining the value of the FLOW token.
“The logical inference to be drawn from these allegations is that funds raised by Dapper Labs through Moments were used to develop and maintain the Flow blockchain,” the judge said.
Other considerations support the judge’s conclusion, he wrote.
As for the third aspect, whether there is a profit expectation, the judge said that Dapper Labs said that there should be a “continuous” profit promise, which “falsely distorted” the law, and the appeals court believed that this was not a case.
“With respect to the allegations here, the Court finds that Defendant’s public statements and marketing materials objectively resulted in the buyer’s expectation of a profit,” the judge wrote, citing the Top Shot tweet as an example.
“Plaintiff’s allegations, including those detailed above, are sufficient to support the conclusion that Moments were purchased primarily for investment purposes.”
The final test, the efforts of others, also appeared to be met, the judge said.
“As mentioned above, the value of Moments may come almost entirely from Dapper Labs’ ongoing work on the Flow blockchain, allowing for price transparency (and thus affecting value). But perhaps more importantly, it appears to provide buyers with the ability to Transaction. Defendants have failed to admit that the blockchain technology behind Moments is in this regard dangerous to their petition,” he wrote.
The judge also said the existence of a secondary market controlled by Dapper Labs supports his conclusion.
“The allegation that Dapper Labs created and maintained a private blockchain was the basis for the court’s conclusion. By privatizing the blockchain on which Moments’ value rests, and by restricting Moments transactions to the Flow blockchain, buyers must rely on Dapper Labs’ expertise and management efforts, and the continuity of their success and existence.”
The judge said his conclusion that “what Dapper Labs did was the investment contract under Howey was narrow” and that other NFTs may not be securities.
“Rather, it was Dapper Labs’ specific delivery of Moments that would create a full legal relationship between investor and promoter to create an investment contract, and therefore, according to Howey, shares. The NFT offered by Labs, Moments, is an offer for an ‘investment contract’ and thus constitutes a ‘securities’, which must be registered with the SEC.”
Dapper Labs now has three weeks to respond to the lawsuit.
Immediately following the news, the FLOW token price fell by more than 10%. Surprisingly, however, the altcoin has gained 15% and recovered to $1.28 by press time.
Source: TradingView
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