Federal Judge Rules NBA Top Shot NFTs May Be Considered Unregistered Securities

A federal judge, Victor Marrero, ruled on Wednesday that the NBA Top Shot non-fungible tokens (NFTs) issued by Dapper Labs may meet the requirements to be considered an unregistered security. The case arose in 2021 when an NBA Top Shot collector sued Dapper Labs, claiming that the NBA Top Shot NFTs, known as “Moments” issued via the Flow blockchain, are securities.

United States District Court judge Victor Marrero agreed with the plaintiffs who filed a lawsuit against Dapper Labs on Feb. 22, 2023, noting that NBA Top Shot NFTs could plausibly be unregistered securities in the eyes of the law. On May 13, 2021, Jeeun Friel sued Dapper Labs for selling Top Shot NFTs without registering with the U.S. Securities and Exchange Commission (SEC). Dapper Labs attempted to get the court to dismiss the case, but Marrero denied the company’s motion.

Marrero’s ruling simply allows the case to continue based on the judge’s opinion that NBA Top Shot NFTs may be considered a security. Marrero said the ruling does not apply to the sale and distribution of FLOW, the Flow blockchain’s native crypto asset. However, the Howey Test was applied to the NBA Top Shot “Moments” NFTs, and the Howey analysis is what supports the judge’s decision.

“Although the literal word ‘profit’ is not included in any of the tweets, the ‘rocket ship’ emoji, ‘stock chart’ emoji, and ‘money bags’ emoji objectively mean one thing: a financial return on investment,” Marrero said in the court filing. “The court is persuaded that Dapper Labs’s scheme to sell Moments plausibly reflects horizontal commonality by being ‘intertwined with interest in Dapper Labs,’ its burgeoning new blockchain, and the token that ‘powers it all.’”

On Wednesday, Dapper Labs commented on the lawsuit and the judge’s recent decision. “Today’s order in the Friel v. Dapper Labs matter – which the Court described as a ‘close call’ – only denied our motion to dismiss the complaint at the case’s pleading stage,” the company said on Twitter.

“The judge did not conclude the plaintiffs were right, and it’s not a final ruling on the case’s merits. Courts have repeatedly held that consumer goods – including art and collectibles like basketball cards – are not “securities” under federal law. We’re confident the same holds true for Moments and other collectibles, digital or otherwise,” Dapper Labs added.

What do you think the implications of this ruling could be for the NFT market as a whole? Let us know what you think about this subject in the comments section below.