An NBA Top Shot user is suing Dapper Labs and its CEO, Roham Gharegozlou, for allegedly selling nonfungible tokens (NFTs) as unregistered securities.
Plaintiff Jeeun Friel served Dapper Labs with a summons last week, ordering the firm to respond to a complaint alleging the company sold unregistered securities through the NBA Top Shot marketplace in the form of its tokenized National Basketball Association highlight collectibles.
The plaintiff also alleges that NBA Top Shot intentionally prevented collectors from withdrawing funds for “months on end” to artificially prop up the market value on the platform, pointing to a CNN article from April titled “NBA Top Shot customers can’t get their money out. Experts are confounded.”
The outcome of the lawsuit may be decided by the Howey test, which determines whether a financial transaction qualifies as an “investment contract” and is therefore considered a security.
According to United States Securities and Exchange Commission, an investment contract “exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
A factor that may weaken the case is that the plaintiff does not allege that Dapper Labs promoted the NFTs as investment assets, with the firm's user agreement requiring collectors to agree that they “are using NFTs primarily as objects of play and not for investment or speculative purposes.”
The plaintiff does allege, however, that the platform led investors to “expect profit” from its marketing materials that hyped the success of the platform along with its in-built scarcity for some NFTs that are highly valuable and fetch six-figure sums.
According to data from Cryptoslam, NBA Top Shot’s secondary peer-to-peer market hosts more than $900,000 worth of trades daily, on a 30-day rolling average.
News of Dapper Labs being sued sparked a spirited debate on Reddit in the r/Nbatopshot subreddit.
User “Nftaddct” noted they personally “don’t feel like Moments are securities”; however, the court might not view it that way:
“Securities have a broad definition. Apparently, Roham himself referred to 'investing in Moments' during some of the office hours. This was pointed out in a thread over the weekend.”
Redditor “WhyAlltheHubbub,” who claimed to be a “lawyer, but not a securities expert,” commented:
“I’d be shocked if legally these are classified as securities. That said, the ability to pursue discovery and see if there is anything nefarious going on related to slowing the withdrawal process would be interesting.”
Redditor “FartyMcPoopyBalls” noted that the securities claim may fall short, as the platform “has never marketed their NFT’s ability to turn a profit. They have always spoken in terms of collectibility, and the comparison of Top Shots to trading cards has always been made.”
Lewis Cohen, co-founder of the blockchain-focused boutique law firm DLx Law, told Forbes that regardless of the outcome, this case could set a precedent for other NFT marketplaces in the future:
“If this is the new standard for ‘investment contracts’ there are many other businesses out there that should start worrying.”
Dapper Labs has 30 days to respond to summons and has yet to publicly comment on the allegations.