The creator of the NBA Moments NFT Must Face Suit on the status of security

The creator of the marketplace for National Basketball Association‘s Top Shots NFTs must face a lawsuit accusing it of selling unregistered securities, after a judge refused to dismiss the complaint.

The suit, filed in 2021, claims that Dapper Labs violated US securities law by offering Top Shot Moments – digital video clips of highlights from NBA games – without registering them with regulators and used its control over the collectibles to prevent investors from withdrawing their money.

Wednesday, U.S. District Judge Victor Marrero denied a request by Dapper Labs to throw out the suit before trial. He found that the plaintiffs had sufficiently alleged that Moments are securities, under the relevant legal standard, for the case to proceed. Marrero said that trading with Moments is limited to the company’s Flow blockchain, and therefore buyers trust Dapper’s expertise and management “as well as its continued existence.”

“Hypothetically, if Upper Deck or Topps, two longtime manufacturers 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,” Marrero wrote. “That is not true here, where plaintiffs claim that the pooling of capital generated from the sale of Moments propped up the Flow Blockchain and where the value of Moments is intertwined with the success of the blockchain and Dapper Labs.”

Dapper said the case is far from over.

The judge “did not conclude that the plaintiffs were right, and it is not a final decision on the merits of the case,” spokeswoman Stephanie Martin said in a statement. “Courts have repeatedly found that consumer goods—including art and collectibles like basketball cards—are not securities under federal law. We are confident that the same applies to Moments and other collectibles, digital or otherwise, and look forward to defending our position in court as the case continues.”

The decision appears to be the first to address whether non-fungible tokens are securities, Marrero said. He cautioned that that doesn’t mean all NFTs are securities and said they need to be assessed on a case-by-case basis, and that it’s the way Dapper offers Moments that differentiates the assets.

“Dapper Labs maintains private control over the Flow Blockchain, which substantially, if not entirely, dictates Moments’ use and value,” the judge wrote, adding that Dapper “designated Moments as a means for buyers to realize substantial profits through the low the selling prices for packages and marketing the substantial profits others had made through sales” on Dapper’s proprietary marketplace.

Without Dapper’s “essential efforts to maintain the Flow Blockchain and Marketplace, Moments would be worthless,” he said.

The case is Friel v. Dapper Labs, 21-cv-5837, US District Court, Southern District of New York (Manhattan).

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To contact the reporter about this story:
Chris Dolmetsch in Federal Court in Manhattan at [email protected]

To contact the editors responsible for this story:
Anthony Lin at [email protected]

Peter Jeffrey

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