Federal Judge Rules Dapper Labs’ Top Shot NFTs May Be…

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Dapper Labs could be forced to face a lawsuit filed by the Securities and Exchange Commission (SEC) which alleges that the NBA Top Shots NFTs Could be securities. 

The judge allowed the lawsuit despite arguments by Dapper Labs that NFT moments are exactly like baseball cards. 

The Securities Debate 

A federal judge has ruled that the NBA-branded “Top Shot” NFTs may be securities. The ruling comes over a year after a class action lawsuit was filed against Dapper Labs and its CEO, Roham Gharegozlu, by the Securities and Exchange Commission (SEC) in New York. According to the lawsuit, Dapper Labs and Gharegozlu violated several securities labs through their NFT collection, NBA Top Shots Moments, by offering them without registering with the US Securities and Exchange Commission. 

The lawyer representing Dapper Labs argued in court that Basketball cards could not be described as securities, stating, 

“Basketball cards are not securities. Pokémon cards are not securities. Baseball cards are not securities. Common sense says so. The law says so. And, courts say so.”

However, Judge Victor Marrero, who is presiding over the case, deemed it fit to let the case move forward. 

“The Court finds that Plaintiffs’ allegations render each consideration under Howey facially plausible and survive Defendants’ Motion to Dismiss the alleged violation of Sections 5 and 12 of the Securities Act. In totality, the economic realities of this case support the court’s conclusion that the AC’s 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 SEC.”

The judge also ruled that Dapper Labs’ FLOW tokens, while not securities themselves, are integral to the totality of the scheme. 

“Plaintiffs have alleged that, without FLOW tokens, no transactions on the Flow Blockchain can be validated. Indeed, the ‘Proof-of-Stake’ mechanism employed by the Flow Blockchain requires FLOW to power it and incentivize miners to validate transactions. In that respect, FLOW’s utility creates value for Moments through the network’s consensus as to ownership and the price of each transaction.”

Examining The Howey Test

Dapper Labs had filed a motion to dismiss the lawsuit in September, arguing that a collection of basketball cards cannot be defined as securities. However, Judge Marrero disagreed with this interpretation, denying Dapper Labs’ motion to dismiss the lawsuit. In his ruling, the judge went through the intricacies of the Howey Test. The Howey Test refers to a legal standard used since the 1930s to determine which assets qualify as securities. It is often referred to by the SEC in cases involving cryptocurrencies and NFTs, which the current SEC Chair, Gary Gensler, believes, are securities. 

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The Howey Test requires that an investment be made through a common enterprise, expecting a profit from the efforts of others. According to the judge, the first prong of the Howey Test is met because users spent money to purchase the Moments NFTs from Dapper Labs. Neither party disputes this. Regarding there being “common enterprise,” the judge referred to the definition of “pooling” of investor funds. He also referred to other precedents, such as the SEC lawsuits against Telegram and Kik Interactive and the Department of Justice’s case against Maksim Zaslavskiy. 

According to the judge, the court was convinced that the plaintiff adequately alleges pooling, thus surviving the motion to dismiss. The judge also stated that Dapper Labs misstated the law by saying there needed to be a “persistent promise of profit.” The judge cited screenshots of Top Shot tweets as examples, which objectively led purchasers to expect profits through the use of “stock chart” and “money bag” emojis. 

“As to the allegations here, the Court finds that Defendants’ public statements and marketing materials objectively led purchasers to expect profits.”

The judge also added that the existence of a secondary marketplace controlled by Dapper supports these observations. 

“The allegations that Dapper Labs created and maintains a private blockchain is fundamental to the Court’s conclusion. By privatizing the blockchain on which Moments’ value depends and restricting the trade of Moments to only the Flow Blockchain, purchasers must rely on Dapper Labs’s expertise and managerial efforts, as well as its continued success and existence.”

Case Far From Over 

While the judge may have sided with the SEC regarding the filing, the case against Dapper Labs is far from concluding. The current order only denied the motion to dismiss filed by Dapper Labs but is obviously not a final ruling in the case. Spokesperson for Dapper Labs, Stephanie Martin, said in a statement, 

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“Courts have repeatedly found that consumer goods – including art and collectibles like basketball cards – are not securities under federal law.”

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Source: ryptodaily.co.uk

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