Dapper Labs faces raps over NBA Top Shot NFTs allegedly breaching securities laws

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A U.S. District Court has struck out the application of Dapper Labs seeking to dismiss a suit alleging that its NBA Top Shot non-fungible token (NFT) is an unregistered security.

In dismissing Dapper Labs’ appeal, District Judge Victor Marrero stated that the digital collectibles, known as NBA Top Shot Moments, appeared to have elements of being a security under the application of the Howey test. According to the Howey test, a transaction will pass as a security if there is an investment of money in a common enterprise with the expectation of profit stemming from the efforts of another party.

“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,” said District Judge Marrero.

NBA Top Shot rose to fame during the bull run of 2021 and is among the top 10 NFT collections by transaction volumes. The project allows NBA fans to collect NFTs in video format of special highlight reels of their favorite players.

Dapper Labs, makers of the NBA Top Shot NFT, and its CEO Roham Gharegozlou were slammed with a lawsuit by Jeeun Friel, Gary Leuis, and John Austin for offering unregistered securities to the public in violation of existing securities law. Last September, Dapper Labs applied to strike out the suit claiming that its NFTs are not securities under any interpretation.

“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,” said the Dapper Labs’ legal team.

District Judge Marrero clarified that his ruling should not be extended to all digital collectibles. Rather, the peculiarities of each case should be considered before deciding if the NFT operates as a security.

Shaking the hornet’s nest with securities

The ‘cryptoverse’ has been buzzing with conversation over the U.S. Securities and Exchange (SEC) Wells Notice to Paxos to halt the issuance of Binance USD (BUSD) stablecoins. The notice suggested that Paxos was offering unregistered securities to the public, a move that has elicited reactions in the extremes.

Several outcomes could emerge from the Wells Notice, including the possibility of all stablecoin issuers in the U.S. seeking registration with the SEC or a lengthy battle in court. The SEC’s crackdown on digital asset staking is also a source of concern for investors in the ecosystem following Kraken’s $30 million settlement.

Other jurisdictions are keeping a close eye on events as they unfold in the U.S., with South Korean regulators poised to crack down on staking amongst exchanges in the country.

Watch: Tokenizing Assets & Securities on Blockchain