Vancouver-based Web3 company Dapper Labs is facing a lawsuit claiming that its NBA Top Shot Moments non-fungible tokens (NFTs) constitute unregistered securities.
“We look forward to vigorously defending our position in Court as the case continues.”
– Dapper Labs
The proposed class action was first filed in 2021 in the Southern District of New York by NBA Top Shot Moments buyers. It represents part of a broader fight over how to classify crypto assets like NFTs. The plaintiffs allege that Dapper Labs violated United States (US) securities law by selling Moments to professional basketball fans without registering them with regulators. The lawsuit also alleges that Dapper improperly controlled the collectibles.
On February 22, US District Judge Victor Marrero denied Dapper Labs’ motion to dismiss the suit before trial. In his decision, Marrero found that given the “economic realities” at stake, the plaintiffs allegations “pass muster at this stage.”
“In sum, Plaintiffs adequately allege that Dapper Labs’s offer of the NFT, Moments, was an offer of an “investment contract” and therefore a “security,” required to be registered with the [US Securities and Exchange Commission],” wrote Marrero in his decision.
In response to the February 22 order, Dapper Labs emphasized on Twitter that the decision “only denied our motion to dismiss the complaint at the case’s pleading stage,” adding, “the judge did not conclude the plaintiffs were right, and it’s not a final ruling on the case’s merits.”
“As we argued to the Court, Moments are simply modernized trading cards, not financial instruments,” wrote Dapper Labs on Twitter. “Unlike securities, Moments are unique in nature, non-fungible, and don’t contain rights to any underlying financial asset. We look forward to vigorously defending our position in Court as the case continues.”
Dapper Labs, the company behind many popular NFT collectible projects, is known in part for its NBA Top Shot Moments. These Moments are digital cards that represent short digital video clips of NBA game highlights, which buyers can purchase and sell to other players. First launched in 2020, the NFT offerings quickly exploded in popularity. But that hype has faded, NFT sales have flatlined, and Moments trading volumes have fallen.
In his decision, Marrero argued that since the trading of Moments is limited to Dapper Labs’ Flow blockchain, buyers are reliant upon Dapper Labs’ expertise and management “as well as its continued existence.” According to the judge, this differentiates Top Shot Moments from traditional trading cards, which would retain their value if their producers went out of business.
For its part, Dapper Labs highlighted on Twitter that previous court decisions have found that other consumer goods are not securities. “Courts have repeatedly held that consumer goods—including art and collectibles like basketball cards—are not “securities” under federal law,” wrote Dapper Labs. “We’re confident the same holds true for Moments and other collectibles, digital or otherwise.”
Feature image courtesy Dapper Labs.