Published on: 23/02/2023

NBA Top Shot creator to face lawsuit claiming NFTs are securities

A judge ruled on Wednesday that Dapper Labs, the creator of a marketplace for National Basketball Association (NBA) Top Shot non-fungible tokens (NFTs), will have to face a lawsuit claiming that the assets are securities.

In May 2021, the purchasers of Top Shot Moments — digital video clips of NBA game highlights — filed a lawsuit against Vancouver, British Columbia-based Dapper and its founder, Roham Gharegozlou, for unspecified damages.

They argued that Dapper violated U.S. securities laws by offering NFTs without registering them with regulators and bused its control over the popular collectibles.

Lawsuit details

The proposed class action brought by purchasers of NBA Top Shot Moments against Dapper Labs Inc has been allowed to proceed, as U.S. District Judge Victor Marrero in Manhattan rejected Dapper’s request to dismiss the case.

Judge Marrero pointed out that the trading of Top Shot Moments is conducted exclusively on Dapper’s Flow blockchain, and purchasers rely on the company’s expertise, management and continued existence.

The lawsuit alleges that Dapper should have registered the NFTs as securities, as their value is linked to the success of Dapper’s blockchain. It also claims that Dapper earned hundreds of millions of dollars by preventing purchasers from “cashing out” for months.

According to a 64-page decision by Marrero, the purchasers presented “facially plausible” claims that the NFTs were securities.

“In the most general terms, the court is asked to assess whether Moments are more like cardboard basketball cards, i.e., commodities, or more like crypto tokens.”

Victor Marrero, U.S. District Judge

“Here, it is a close call and the court’s decision is narrow,” Marrero wrote.

Marrero’s ruling was backed by the fact that Dapper restricted trading to its Flow blockchain, which is not public, unlike other blockchains that support cryptocurrencies like Bitcoin. Furthermore, he noted that Dapper has a financial stake in the blockchain platform’s success.

Legal battle over NBA Top Shot Moments

Marrero noted that his ruling is the first to address whether NFTs can be considered securities but cautioned that this does not automatically mean all NFTs should be classified as such.

This case is part of a broader legal and regulatory dispute over whether digital assets, including NFTs and cryptocurrencies, should be classified as securities and subject to registration with the U.S. Securities and Exchange Commission (SEC).

U.S. regulators have yet to take a definitive stance on whether NFTs should be considered securities. However, SEC Chair Gary Gensler has called for increased regulation of the crypto industry.

In response to the ruling, Dapper Labs spokeswoman Stephanie Martin explained that many courts had previously ruled that consumer goods are not securities.

“Courts have repeatedly found that consumer goods – including art and collectibles like basketball cards – are not securities under federal law.”

Stephanie Martin, Dapper Labs spokeswoman

“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,” Martin said.

The purchasers’ lawyer Phillip Kim declined to comment on the case.

NBA Top Shot was introduced in 2020 and rapidly became a sensation. It boasts over 1.5 million users, with sales exceeding $1 billion. The collection was developed by Dapper in partnership with the NBA and the National Basketball Players Association and has recorded $982 million in trading volume, as per DappRadar data.