NBA Top Shot creator to face lawsuit over securities status

Image credit: NBA top shot

Dapper Labs, the company behind many popular NFT aggregator projects, will face a lawsuit accusing it of selling unregistered securities. In particular, the company has developed the popular NFT game NBA Top Shot and one of the original NFT collectible games, CryptoKitties.

A class action lawsuit was first filed against Dapper Labs in 2021. The company filed a motion to dismiss the lawsuit before trial. And yet, as Coindesk discovered, U.S. District Judge Victor Marrero denied the request, meaning the case will move forward.

If you’re not familiar with NBA Top Shot, users can go to the site to purchase digital cards that represent NBA “Moments” — which are short video clips of memorable moments. They can then buy and sell some of their cards to other players. The value of these digital collectibles can go up and down over time.

Each digital card is registered as a unique token on a blockchain. While other NFT-based games such as Sorare rely on the Ethereum blockchain, Dapper Labs has decided to develop its own private blockchain called Flow. The company said this new blockchain is optimized for scalability and practicality.

“The Flow Blockchain uses ‘Proof of Stake’ validation to allow the business to scale more efficiently. Dapper Labs also created a token, FLOW, that miners would be able to stake to validate transactions,” Marrero wrote in his decision .

And this is the key to understanding the current lawsuit. In his conclusion, Marrero distinguishes NBA Top Shots moments from other types of NFTs.

“Not all NFTs offered or sold by any company will constitute a security, and each arrangement must be assessed on a case-by-case basis,” he wrote. (And Moments shouldn’t be considered securities either, since the lawsuit hasn’t happened yet.)

So what sets Moments apart from other NFTs? And what makes Moments different from physical sports trading cards? The fact that Moments can only be traded on the Flow blockchain means that Dapper Labs has some control over the value of these Moments.

“The NBA Top Shots Terms of Service also state that Moments have no intrinsic or intrinsic value outside of the Flow Blockchain. […] It follows that if, hypothetically, Dapper Labs went out of business and shut down the Flow Blockchain, the value of all Moments would drop to zero. It is the critical causation that other collectibles cases lack, and that is alleged here,” Marrero wrote.

Even if NBA Top Shot users try to sell their moments, they must go through the official secondary marketplace. “Ownership of the Moments, the price paid for the Moments, and the transfer and sale of the Moments on the Marketplace are all recorded on the Flow Blockchain only. Dapper Labs does not recognize and does not support Moments being sold or traded outside of the Marketplace,” Marrero wrote.

In September 2021, Dapper Labs raised a $250 million funding round with Coatue leading the investment. At the time, the company reached an impressive valuation of $7.6 billion. While NFT sales have dropped quite drastically in recent months, the company managed to attract more than a million users and generate hundreds of millions of dollars in transaction volume. The company takes a cut of newly developed NFTs, marketplace transactions and payout transactions.

While not all NFTs are created equal, the case will have some far-reaching ramifications across the industry – especially for companies using private blockchains.