U.S. District Judge Victor Marrero in Manhattan has ruled that the NBA-branded non-fungible tokens (NFTs) offered by Dapper Labs, known as “NBA Top Shot” Moments, may be securities, according to a court filing on a motion to dismiss filed in a class-action lawsuit against the company and its CEO Roham Gharegozlu.
The lawsuit, filed in New York, alleges that Gharegozlu and Dapper Labs violated federal securities laws by offering the NFT collection without first registering with the US Securities and Exchange Commission (SEC).
In the 64-page decision , Marrero said Dapper reaped hundreds of millions of dollars by preventing purchasers from "cashing out" for months on end, the purchasers made "facially plausible" allegations that their 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," Marrero wrote. "Here, it is a close call and the court's decision is narrow."
Marrero ruled that Dapper Labs’ FLOW tokens were necessary to the totality of the scheme and are “facially plausible” under the Howey Test, which determines whether certain transactions qualify as "investment contracts."
“Plaintiffs have alleged that, without FLOW tokens, no transactions on the Flow Blockchain can be validated. Indeed, the ‘Proof-of-Stake’ mechanism employed by the Flow Blockchain requires FLOW to power it and incentivize miners to validate transactions. In that respect, FLOW’s utility creates value for Moments through the network’s consensus as to ownership and the price of each transaction,” the judge said.
In last September, Dapper Labs filed a motion to dismiss the lawsuit, arguing that its collection of digital basketball cards was not securities, but the judge denied this motion. Lawyers for Dapper Labs argued that their collection of digital basketball cards is not a security, citing precedents such as basketball, Pokemon, and baseball cards, which have not been considered securities by common sense, the law, or courts.
Dapper Labs now has three weeks to respond to the lawsuit.
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