NBA Top Shot Moments nonfungible tokens may be considered a security under the United States security laws, a federal judge said in a Feb. 22 court filing.
The ruling came as federal judge Victor Marrero denied a motion from Dapper Labs CEO Roham Gharegozlou to dismiss a class-action lawsuit claiming its NBA Top Shot NFTs are securities. In denying the motion, the court authorized the case to proceed. Dapper Labs now has 21 days to respond to the court’s decision.
For the verdict, the judge reviewed the Howey test, which determines whether the NFTs qualified as an investment contract subject to U.S. securities laws, according to the court filings. A transaction that is determined to be an investment contract is considered to be a security.
“Ultimately, the Court’s conclusion that what Dapper Labs offered was an investment contract under Howey is narrow. Not all NFTs offered or sold by any company will constitute security, and each scheme must be assessed on a case-by-case basis.”
Judge Victor Marrero also ruled that:
“Rather, it is the particular scheme by which Dapper Labs offers Moments that creates the sufficient legal relationship between investors and promoter to establish an investment contract, and this is a security, under Howey.”
The class action lawsuit was filed in May 2021 by plaintiff Jeeun Friel for allegedly selling NFTs as unregistered securities. It also alleges that NBA Top Shot intentionally prevented collectors from withdrawing funds for “months on end” in order to artificially inflate the market value of the platform.
In response to Judge Marreo's decision, a spokesperson for Dapper Labs told Cointelegraph:
“Importantly, today’s order - which the court described as a ‘close call’ - only denied the defendants’ motion to dismiss the complaint at the pleading stage of the case. It did not conclude the plaintiffs were right, and it is not a final ruling on the merits of the case. 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.”
According to Dapper Labs, NBA Top Shot generated over $230 million in NFT sales as of February 2021, Cointelegraph reported.
This decision comes amid a broader debate about whether different digital assets should be considered securities. On Feb. 9, the U.S. Securities and Exchange Commission (SEC) announced an $30 million settlement with crypto exchange Kraken regarding its staking services. The authority is also probing traditional Wall Street investment advisers offering digital asset custody to its clients without the proper qualifications.
Most recently, the SEC announced a $1.4-million settlement with former NBA player Paul Pierce for allegedly promoting a token project on social media.
This article was updated on Feb. 22 at 9:00pm UTC to include Dapper Lab’s comments on the case.