NBA Top Shot Moments NFTs Are Securities – Sportico.com
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The legal system is cracking down on NFTs.
Last week, a federal judge tentatively concluded that NFTs of game highlights created by Dapper Labs, a Vancouver-based blockchain company that has partnered with the NBA and NBPA, and sold as NBA Top Shot Moments, are securities and thus subject to federal securities laws.
Judge Victor Marrero of the Southern District of New York denied Dapper’s motion to dismiss a lawsuit filed by Virginia resident and Moments buyer Jeeun Friel. Friel claims that Moments – essentially digital basketball cards that can be bought in packs (like cardboard baseball cards) or on a secondary market and then traded, gifted or sold – are functionally the same as stocks and bonds.
Dapper has not filed a registration statement for Moments with the Securities and Exchange Commission. This is problematic since the Securities Act prohibits the offering, sale or delivery of “any security” unless a registration is in effect. Buyers of unregistered securities can sue for damages and raise other claims. The Securities Act defines “security” broadly, with courts focusing on whether individuals invest their money “in a common enterprise” and are led to expect profits.
The denial of Dapper’s motion does not conclusively establish that Moments are securities or that Dapper will lose the case or lose potential appeals to the US Court of Appeals for the Second Circuit or the US Supreme Court. As is often the case in litigation, there is a long road ahead. But the denial do means the case is on track for discovery before trial, where Dapper emails can be accessed and sworn testimony given.
The rejection also signals a positive prognosis for Friel’s case, which Marrero can later confirm as a class action on behalf of “many thousands” of people who bought Moments between June 15, 2020 and today. Furthermore, Marrero’s analysis strengthens the broader argument that NFTs function more like securities than collectibles.
Friel v. Dapper also presents what is called a case of “first impression”. As Marrero wrote, “no other court has addressed either the precise substance or the attitude of the dispute here: over allegations that an unregistered offer to buy or sell, specifically, an NFT constitutes an investment contract.”
Marrero’s opinion emphasized several points.
One is that a Moments buyer does not acquire any intellectual property in the underlying artwork or basketball highlight — such as when a Jayson Tatum shoots a three-pointer — or a right to “exploit the highlight without the express permission of the NBA, NBPA, and Dapper.” Ownership is exclusive to NFTs, which are of varying value based on scarcity and market interest.This arrangement reflects how Dapper, in partnership with the league and players’ association, “puts” a game highlight into an NFT and attaches a serial number to act as a unique identifier.
Dapper earns revenue from Moments in several ways, such as keeping a 5% transaction fee on tokens sold through the marketplace and charging a “withdrawal fee” when a buyer transfers their Dapper balance to a bank account. According to Marrero, Dapper’s “combined market capitalization from sales of Moments on the NBA Top Shot application had reached $1.9 billion.”
Buyers are also limited in how they convert moments into financial returns. Those trying to cash out “have not always been able to, nor has it been quick.” In 2021, Dapper announced a six-to-eight week period when withdrawals would first be “activated” only to then be “processed” over another 20 to 40 days (or more).
Pushing in the direction of security recognition, Marrero emphasized that the value of Moments is “causally related” to the profitability of Dapper. This is because Dapper generates revenue through the sales and transaction fees. The company also keeps buyers’ cash after withdrawals are requested, reportedly as a means to “provide money at a high value” and “prop up the value” of Dapper’s “Flow Blockchain,” which is used to record transactions.
Marrero also distinguished Moments from baseball cards and other physical collectibles. If Dapper “went out of business and shut down the Flow Blockchain, the value of all moments would drop to zero,” he wrote. In contrast, “if Upper Deck or Topps, two longtime producers of physical sports trading cards, were to go out of business, the value of the cards they sold would be completely unaffected, and might even increase, much like posthumously discovered art.”
In addition, Marrero reasoned that Dapper’s “public statements and marketing materials objectively led buyers to expect profits.” He noted that promotional tweets may not have used the word “profit,” but emojis of rocket ships, stock charts, and money bags “objectively mean[t] one thing: a financial return on investment.”
Marrero also unpacked buyers’ motivations. While many buyers are NBA fans and enjoy collectibles, some evidence suggests that their primary motivation is to invest. For example, he refers to an investor who paid $208,000 for a LeBron James dunk Moment because “it was worth seven figures right away” and that “investing in [Moments] is much like investing in shares. … It’s not just about what the best company or best player is. It’s about understanding what’s baked into the price and what other people don’t see.”
Marrero cautioned that his analysis is limited to moments rather than NFTs in general. “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,” he stressed. Nevertheless, the ruling will apply to any company that has a similar structure to an NFT.
The judge also noted that “celebrities, influencers and NBA players” have been gifted with moments. To the extent that anyone is compensated, either by salary or gifts, to promote Moments or other NFTs, they could eventually face lawsuits like those that have hit Tom Brady, Steph Curry, Naomi Osaka and other stars with ties to it criminally implicated crypto platform FTX and also, in Curry’s case, ties to the Bored Ape Yacht Club NFT series.
