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Dapper Labs will be forced to face a lawsuit from the Securities and Exchange Commission (SEC) alleging that the NFT Top Shot NFT Moments on its platform are unregistered securities, following a judge’s refusal to dismiss the case on Wednesday.
United States District Court Judge Victor Marrero ruled that such NFTs may plausibly qualify as securities under the Howey Test.
Are NFTs Securities?
Per Marreno’s ruling, part of what makes the SEC’s allegations “facially plausible” is that the NFTs in question circulate on the Flow blockchain – a private network developed and maintained by Dapper. Without Dapper’s efforts, such NFTs would theoretically have no value, ticking the final prong of the Howey Test requiring another party’s efforts to uphold an investment’s value.
“The economic realities and technological interplay between FLOW, the Flow blockchain, and Moments, as alleged by Plaintiffs, are what supports the Court’s conclusions,” read the filing.
The Howey Test is a legal standard used since the 1930s for determining what assets constitute securities. It is often invoked by the SEC today when making rulings pertaining to cryptocurrencies and NFTs, of which the agency’s chairman – Gary Gensler – believes a vast majority are securities.
Howey requires that an investment be made in a common enterprise, with an expectation of profits based on the efforts of others. The first prong of the test is undoubtedly met given that much money has been spent purchasing Moments NFTs from Dapper, and is disputed by neither the company nor the SEC.
Conversely, Dapper’s motion to dismiss argued there is no “common enterprise” as the fortunes of each NFT investor have no bearing on other investors, nor the efforts of a central promoter. However, the court determined that the SEC adequately alleged that “purchasers’ fortunes were tied to the overall success of Dapper Labs.”
The court also agreed that Moments purchases were objectively led to expect profits by Dapper. This includes Tweets from the @NBATopShot account promoting record-breaking NFT sales with “stock chart” and “money bags” emojis attached.
No Final Ruling Yet
Though the judge sided with the SEC in its filing, its case against Dapper is far from over. The order only denied Dapper’s motion to dismiss but is not a final ruling on the case’s merits.
NBA Top Shots are NFTs containing moments from NBA history stored in a video clip and are often likened to digital trading cards.
“Courts have repeatedly found that consumer goods – including art and collectibles like basketball cards – are not securities under federal law,” said spokesperson Stephanie Martin said in a statement, according to Bloomberg.