The judge acknowledged that investors could expect to profit from the company’s efforts, which is the definition of a security

​US court allows the possibility of NFT NBA Top Shot by Dapper Labs to be recognized as securities

24.02.2023 - 15:15

342

4 min

A New York judge has ruled that a proposed class-action lawsuit against Dapper Labs and its Top Shot Moments NFT collection can move forward because the offering could have been an unregistered securities offering.

In the eyes of the plaintiffs, the offering should have registered with the SEC but instead, it opted to withhold important information from investors about the risks of investing in its NFTs. Many of these have collapsed since their purchase.

In his ruling, US District Judge Victor Marrero echoed plaintiffs’ claims that Top Shot Moments likely involved an investment contract.

However, Dapper Labs argued that it had more similarities to non-security collectibles like trading cards. To support its argument, it noted that its NFTs include images from professional basketball games.

Rare sports trading cards can be worth thousands of dollars but typically don’t pass the four-pronged Howey Test.

Top Shot Moments could have passed the Howey Test

The Howey Test lists conditions that transactions must meet to qualify as an investment contract. Put simply, an investment contract exists when purchasers invest money into a common enterprise with a reasonable expectation to profit from the efforts of others.

The judge ruled that plaintiffs have “adequately alleged” that these NBA-themed NFTs passed the Howey Test because the buyers could reasonably expect profits from the efforts of others.

Two of the prongs were an easy pass. The vast majority of NFT buyers are speculators, investing money with an expectation of profit. This could have been true of Top Shot Moments buyers.

In addition, these buyers might have shared horizontal commonality in an enterprise maintained by Dapper Labs on its Flow blockchain. Specifically, all of them owned a Flow-based NFT from the same collection with similar technical and NBA-themed media, and all of the NFTs benefited from Dapper Labs’ managerial efforts.

The fourth prong was also relatively straightforward: The efforts of others. In this case, Dapper Labs solely maintains the Flow blockchain, a private blockchain used for Top Shot Moments. Judge Marrero reiterated that only Dapper Labs operated Flow. This meant Top Shot Moments buyers obviously relied on the efforts of others.

In all, the plaintiffs will have to continue arguing that the NFTs are securities. The judge is merely allowing their case to proceed.

Most NFTs use a public blockchain like Ethereum or Solana. Unlike private blockchains like Flow, public blockchains usually don’t rely on a single party to maintain them.

Securities classification on a case-by-case basis

Judge Marrero clarified that his ruling doesn’t necessarily apply to all NFT collections. He said future cases involving allegations that NFTs are securities should be assessed on a case-by-case basis.

Despite the judge ruling as narrowly as possible, some digital asset watchers expressed annoyance and concern about what it meant for NFTs generally.

Others considered it an incentive for big entertainment companies like Disney to consider allowing their NFTs to use other blockchains for legal protection.

What are NBA Top Shot NFTs, anyway?

NBA Top Shot launched its NFT collection in 2020 as a joint endeavor between Dapper Labs, the National Basketball Association (NBA), including the NBA Players Association. Many Top Shot NFTs include short video clips of players making dramatic shots during basketball games.

Like traditional basketball cards, a rare Top Shot could sell for a lot of money. For example, a Top Shot that showed Lebron James dunking on Nemanja Bjelica during one 2019 game sold on the secondary market for $208,000.

The collection generated considerable enthusiasm among NBA fans. One fan expressed annoyance when the Utah Jazz confiscated a poster featuring a Top Shot when he tried to take it to the stadium.

Attorneys for the plaintiffs say the proposed class-action lawsuit could cover thousands of people who bought Top Shot Moments NFTs and experienced losses since June 2020. There is a large class of harmed investors. At its peak, hundreds of thousands of people routinely queued up for a chance to buy a weekly pack drop. They say more than 800,000 people were using Top Shot Moments in April 2021.

In summary, a US District Judge has ruled that Top Shot Moments may qualify as securities while deciding that the class action lawsuit brought by buyers may proceed.

For more informed news, follow us on Twitter and Google News or subscribe to our YouTube channel.

This material is taken from the website https://protos.com.

Subscribe to Getblock Magazine and stay up to date with the latest news from the world of cryptocurrencies and the digital economy