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Dapper Labs’ NBA NFTs Appear to be Securities


The Court of the Southern District of New York concluded that Dapper Labs’ NBA NFT ‘Top Shot Moments’ collection was offering an investment contract, following Howey criteria.

A federal judge’s Wednesday examination finds that Dapper Labs’ offering of its NBA NFT “Top Shot Moments” may be securities. 

The ruling on a motion to dismiss comes a year and a half after a class-action lawsuit was filed against Dapper Labs and its CEO Roham Gharegozlu in New York over an NBA NFT collection in the form of basketball-inspired trading cards.

NBA Top Shot Moments was amongst the biggest winners when NFTs first reached mainstream popularity, enjoying $232 million in monthly sales in February 2021.

A Moment back in February 2021 sold for $181.81, but now, average sales are around $10.40.

The Moments NFT collection, featured on the NBA Top Shot platform, were created on Dapper Labs’ Flow blockchain network, where FLOW is the network’s native token. The Flow blockchain is known for its suite of fan-powered sports-inspired NFT platforms, including NBA Top Shot, NFL ALL DAY, and UFC Strike.

“Plaintiffs have alleged that, without FLOW tokens, no transactions on the Flow Blockchain can be validated. Indeed, the ‘Proof-of-Stake’ mechanism employed by the Flow Blockchain requires FLOW to power it and incentivize miners to validate transactions. In that respect, FLOW’s utility creates value for Moments through the network’s consensus as to ownership and the price of each transaction,” the judge said.

In September 2022, Dapper Labs filed a motion to dismiss the lawsuit, with lawyers arguing “basketball cards are not securities. Pokemon cards are not securities. Baseball cards are not securities. Common sense says so. The law says so. And courts say so.”

“When Dapper sold its Moments, it was selling formed products not as part of capital fundraising but as products. This was not a capital investment drive, not an appeal to passive investors, but the sale of cards to collectors,” said lawyers for Dapper Labs and Gharegozlou.

The lawsuit alleges that Gharegozlu and Dapper Labs have violated federal securities laws in  its offering of the NBA Top Shot Moments NFT collection without prior registration with the US  Securities and Exchange Commission (SEC).

The plaintiffs of the case, Gary Leuis, Jeeun Friel, and John Austin, have accused Dapper Labs of making exorbitant amounts of profit through the sale of unregistered securities, but also “propping up the market for Moments as well as the overall valuation of NBA Top Shot” by preventing users from withdrawing their assets for months. As Top Shot users couldn’t withdraw their money, Dapper continued to advertise sales of Moments to draw interest and increase value for the collection, its Flow Blockchain, and FLOW token.

“The Court finds that Plaintiffs’ allegations render each consideration under Howey facially plausible and survive Defendants’ Motion to Dismiss the alleged violation of Sections 5 and 12 of the Securities Act,” ruled District Judge Victor Marrero, of the Southern District of New York. 

The Howey Test is a set of criteria created and used by the US Supreme Court to determine what transactions qualify as “investment contracts”, and thus considered securities.

Under the Howey Test, an investment instrument is considered a security when:

  1. There is an investment of money
  2. in a common enterprise
  3. with the expectation that it will give profit
  4. from the efforts of others.

In the ruling, Dapper Labs’ FLOW tokens were determined as “necessary to the totality of the scheme at issue,” despite not necessarily securities themselves.

What did the judge say?

Despite Dapper Labs’ efforts, Judge Marrero disagreed, denying the motion to dismiss the lawsuit in his Wednesday ruling.

Judge Marrero then proceeded through the criteria for the Howey Test for the NFT collection.

Howey Test Criteria Key Info
There is an investment of money
  • No objection from either party.
in a common enterprise
  • Judge Marrero examined the definition of “common enterprise” in the lens of “pooling” of investors’ funds.
  • Judge Marrero adds that the “purchasers’ fortunes were tied to the overall success of Dapper Labs,” as Dapper Labs owns and controls the Flow Blockchain, alongside the online marketplace where the Moments NFTs were sold and traded.
    • Plaintiff claims include that Dapper Labs held funds from the sale of the Moments NFTs for the purpose of fundraising and maintaining the value of FLOW.
  • The court infers that the capital that Dapper Labs raises through offering Moments is used to develop and maintain the Flow Blockchain.
with the expectation that it will give profit
  • Judge Marrero says that Dapper Labs “misstated” the law, saying there needs to be a “‘persistent’ promise of profit.” Courts however say that isn’t the case.
  • “As to the allegations here, the Court finds that Defendants’ public statements and marketing materials objectively led purchasers to expect profits,” the judge wrote, using screenshots of Top Shot tweets as examples.
  • Plaintiff allegations and such screenshots  mentioned are adequate enough evidence to support that the Moments NFTs were primarily purchased for investment purposes.
from the efforts of others.
  • “As detailed above, it is plausible that Moments’ value is derived almost entirely from the continued operation by Dapper Labs of the Flow Blockchain, which enables price transparency (and thus influences value) but, perhaps more critically, appears to provide purchasers with the ability to trade at all. Defendants’ failure to acknowledge the blockchain technology that underlies Moments is fatal to their Motion in this respect,” the judge wrote.
    • Judge Marrero notes that the existence of  a secondary NFT marketplace operated by Dapper Labs also supports this clause.
    • Allegations that Dapper Labs created and maintains a private blockchain have led the court to conclude that Moments’ value depends on the blockchain’s privatisation.
  • As Moments is only available for trade in the Flow Blockchain, “purchasers must rely on Dapper Labs’s expertise and managerial efforts, as well as its continued success and existence,” wrote the judge.

The judge came to the conclusion “that what Dapper Labs offered was an investment contract under Howey is narrow,” and that other NFTs may not be securities

In this case, how Dapper Labs was conducting business added to the court’s conclusion that the Moments NFTs may be securities.

“Rather, it is the particular scheme by which Dapper Labs offers Moments that creates the sufficient legal relationship between investor and promoter to establish an investment contract, and thus a security, under Howey,” he wrote. 

“In totality, the economic realities of this case support the Court’s conclusion that the AC’s allegations pass muster at this stage. In sum, Plaintiffs adequately allege that Dapper Labs’s offer of the NFT, Moments, was an offer of an “investment contract” and therefore a “security,” required to be registered with the SEC.”

However, it should be noted that this case is far from over.

The judge “did not conclude the plaintiffs were right, and it is not a final ruling on the merits of the case,” spokesperson 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 the same holds true for Moments and other collectibles, digital or otherwise, and look forward to vigorously defending our position in court as the case continues.”

Dapper Labs now has three weeks to respond to the case – Friel v. Dapper Labs, 21-cv-5837, US District Court, Southern District of New York (Manhattan).

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