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Dapper laboratories could be forced to face a lawsuit filed by the Committee on Securities and Exchanges (sec) alleging that the NBA top shots nfts could be securities.
The judge authorized the trial despite arguments by the laboratories dapper that the nft moments are exactly like baseball cards.
The Securities Debate
A federal judge has ruled that the NBA-branded “Top Shot” NFTs may be securities. The decision takes place more than a year after a class action has been filed against the dapper laboratories and its CEO, roham gharegozlu, by the New York-based Securities and Exchange Commission (sec). According to the lawsuit, Dapper Labs and Gharegozlu violated several securities labs through their NFT collection, NBA Top Shots Moments, by offering them without registering with the US Securities and Exchange Commission.
The lawyer representing Dapper Labs argued in court that Basketball cards could not be described as securities, stating,
“Basketball cards are not securities. Pokemon cards don't make headlines. Baseball cards don't make headlines. This is common sense. It says so in the legislation. And the courts are telling us that.
However, Justice Victor Marrero, the presiding judge, saw fit to allow the matter to proceed.
“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. Overall, the economic realities of this case support the Court's finding that the CA's claims are acceptable at this point. In sum, The applicants are correct in their submission that Dapper Labs' offer regarding the NFt, Moments, was a "Investment Agreement" offer and, therefore, a "value" to be reported to the SEC.
The judge also ruled that the Dapper Labs FLOW tokens, even though they are not titles themselves, are an integral part of the overall system.
"The complainants claimed that, without flow chips, no transaction on the flow blockchain can be validated. Indeed, the "proof of the issue" mechanism used by the flow chain requires that the flow feeds it and encourages the miners to validate the transactions. In this respect, the utility of the flow creates value at times through the consensus of the network as to the ownership and price of each transaction.”
Examining The Howey Test
Dapper Labs had filed a motion to dismiss the lawsuit in September, arguing that a collection of basketball cards cannot be defined as securities. However, Justice Marrero did not agree with that interpretation, refusing Dapper Labs' request to dismiss the prosecution. The judge's decision dealt with the subtleties of the Howey test. Howey refers to a legal standard that has been used since the 1930s to determine which assets are considered securities. It is often mentioned by the sec in cases involving cryptocurrencies and nfts, that the current sec's president, gary gensler, estimates, are transferable securities.
The howey test requires an investment to be made through a joint venture, expecting a return on the efforts of others. According to the judge, the first part of the howey test is met because users have spent money to buy dapper lab nfts. That is not disputed by either party. With respect to the existence of a "joint venture", the Court referred to the definition of "pooling" of investor funds. He also referred to other precedents, such as the second trials against the cable and interactive kik and the case of the Ministry of Justice against maksim zaslavskiy.
In the opinion of the judge, the panel was satisfied that the applicant adequately alleged pooling, thus surviving the motion to dismiss. The judge also said that specialized laboratories have misinterpreted the law by saying "a promise of lasting profit". The judge quoted screen shots from top shot tweets as examples, which objectively led buyers to expect profits thanks to the use of "inventory chart" and "bag of money" emojis.
"As far as the allegations in this case are concerned, the Court finds that the defendants' public statements and marketing documents objectively led buyers to expect profits."
The judge also added that the existence of a secondary market under Dapper's control corroborates those submissions.
"Allegations that specialized laboratories have created and maintain a private blockchain are critical to the Court's finding. Privatizing the blockchain on which the value of Moments depends and limiting the trade of Moments to Flow Blockchain alone, Buyers should count on the expertise and management efforts of Dapper Labs, and its success and livelihood."
Case Far From Over
While the judge may have sided with the SEC regarding the filing, the case against Dapper Labs is far from concluding. The present order has only rejected the request for dismissal filed by the dapper laboratories, but is obviously not a final decision in the case. Spokesperson for Dapper Labs, 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.”
