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  • L Misthos and S Pettigrove

Judge dunks Top Shots in securities ruling

A US judge has ruled that certain digital assets (NFTs) sold by Dapper Labs' NBA Top Shot platform may qualify as securities. Federal Judge Victor Marreo rejected a preliminary motion by Roham Gharegozlou, the CEO of Dapper Labs, permitting a class-action lawsuit which alleges that NBA Top Shot NFTs are securities.

As a result, the Court has allowed the case to move forward. Dapper Labs has been given a 21-day window to respond to the Court's ruling.

Dapper Labs' NBA Top Shot allows users to buy, sell, and trade officially licensed NBA NFT collectibles in the form of blockchain-based digital "moments." These moments are essentially short video clips of significant NBA plays and highlights that are sold as unique, verifiable tokens on the blockchain.

In the case before the U.S. court, a Top Shot user alleged that Dapper Labs had violated U.S. securities law by selling moments as unregistered securities through the platform. The judge applied the Howey test and ruled in favor of the plaintiff on a preliminary motion seeking to dismiss the action, stating that the NFTs in question may qualify as investment contracts under US law and therefore meet the legal definition of securities.

In his ruling, the judge attributed significant weight to the fact that TopShots were offered on the private Flow blockchain and marketplace which were created and controlled by Dapper Labs, which meant that purchasers relied on the ongoing managerial efforts of Dapper Labs to support the value of the NFTs. The Court also sighted certain statements made by Dapper Labs and its CEO regarding the prospect of the popular NFTs maintaining or rising in value over time.

It appears likely that Dapper Labs will contest the ruling. A spokesperson for Dapper Labs reportedly stated:

Importantly, today’s order only denied the defendants’ motion to dismiss the complaint. It did not conclude the plaintiffs were right, and it is not a final ruling on the merits of the case

While this remains a preliminary ruling, it is likely to result in increased regulatory scrutiny of the securities aspects of NFTs. It remains to be seen how other blockchain-based collectible platforms will respond to the ruling, and whether they will make changes to their offerings in light of the ruling in this case. However, the judge in this case was careful to note that his ruling may not apply to NFTs generally and each NFT project would need to be assessed on a case by case basis.


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