Dapper Labs Can’t Avoid a Securities Lawsuit Over NBA Top Shot NFTs

NBA Top Shot developer Dapper Labs and its CEO, Roham Gharegozlou, will face a lawsuit accusing the company of selling unregistered securities in the form of its “Moments,” which are non-fungible tokens for sports fans.

Despite Dappers’ lawyer’s claims that “Basketball cards are not securities. Pokemon cards are not securities. Baseball cards are not securities. Common sense says so. The law says so. And the courts say so,” Judge Victor Marrero decided to let the case go forward.

Overall, the economic realities of this case support the Court’s conclusion that AC’s claims pass at this stage. In sum, Plaintiffs sufficiently allege that Dapper Lab’s offering of the NFT, Moments, was an offering of an “investment contract” and therefore a “security” required to be registered with the SEC.

The plaintiffs, Gary Leuis, Jeeun Friel and John Austin, accuse Dapper Labs of not only making hundreds of millions of dollars in profits through the sale of unregistered securities, but also “propagating the market for Moments as well as the overall valuation of NBA Top Shot” by preventing users from withdrawing their funds for several months.While Top Shot users could not withdraw, Dapper Moments highlighted sales to attract interest and increase the value of the Flow Blockchain and Flow token.

When we covered NBA Top Shot near the peak of activity in March 2021, many users were still unable to get their money out of the platform. According to CryptoSlam, the number of active buyers that month peaked at 184,000 before falling sharply, while a March 26, 2021 post on the company’s blog said about 28,000 users were approved for withdrawals, with 5,000 more to be added next week.

The plaintiffs cited marketing for NBA Top Shot that highlighted high-priced sales of Moments and increased commerce on the platform, which this tweet on a $208,000 transaction for a LeBron James Moment. The plaintiffs referenced our 2021 article in their lawsuit as part of their argument that Dapper Labs did not stop Top Shot users from viewing and referring to their Moments purchases as investments.

In their counter-arguments, lawyers for Dapper Labs and Gharegozlou wrote: “When Dapper sold its Moments, it sold formed products not as part of capital raising, but as products. This was not a capital investment drive, not an appeal to passive investors, but the sale of cards to collectors.”

No matter how you look at them or what the courts ultimately decide, interest in NBA Top Shot Moments as either investments or “shaped products” quickly declined from a peak two years ago, when market tracker CryptoSlam recorded $45 million in sales in just one day February 22, 2021, as part of a $224 million month.

Today, CryptoSlam shows $71,645 in sales and just over 12,000 unique buyers this month… so far.