Dapper Labs faces rap over NBA Top Shot NFTs allegedly violating securities laws

A US district court has struck out Dapper Labs’ application seeking to dismiss a lawsuit alleging its NBA Top Shot non-fungible token (NFT) is an unregistered security.

In dismissing Dapper Labs’ appeal, District Judge Victor Marrero stated that the digital collectibles, known as NBA Top Shot Moments, appeared to have elements of collateral under the application of the Howey test. According to the Howey test, a transaction will pass as a security if it is an investment of money in a joint venture with the expectation of profit arising from the efforts of another party.

“The Court finds that Plaintiffs’ allegations make each assessment under Howey facially plausible and survive Defendants’ motion to dismiss the alleged violation of Sections 5 and 12 of the Securities Act,” District Judge Marrero said.

NBA Top Shot rose to fame during the 2021 bull run and is among the top 10 NFT collections by transaction volume. The project allows NBA fans to collect NFTs in video format with special highlights from their favorite players.

Dapper Labs, the makers of the NBA Top Shot NFT, and its CEO Roham Gharegozlou were criticized in a lawsuit by Jeeun Friel, Gary Leuis and John Austin for offering unregistered securities to the public in violation of existing securities laws. Last September, Dapper Labs filed to strike out the lawsuit, arguing that its NFTs are not securities under any interpretation.

“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,” Dapper Labs’ legal team said.

District Judge Marrero clarified that his ruling should not be extended to all digital collectibles. Rather, the particularities of each case should be assessed before deciding whether NFT functions as a security.

Shake the hornet’s nest with securities

The “cryptoverse” has been buzzing with talks over the US Securities and Exchange (SEC) Wells Notice to Paxos to stop the issuance of Binance USD (BUSD) stablecoins. The notice suggested that Paxos was offering unregistered securities to the public, a move that has drawn extreme reactions.

Several outcomes could emerge from the Wells Notice, including the possibility of all stablecoin issuers in the US seeking registration with the SEC or a protracted court battle. The SEC’s crackdown on digital asset efforts is also a source of concern for investors in the ecosystem following Kraken’s $30 million settlement.

Other jurisdictions are closely watching events as they unfold in the US, with South Korean regulators poised to crack down on efforts among exchanges in the country.

See: Tokenizing Assets & Securities on the Blockchain

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