NFT Projects Beware: Top Shots Class Action Could Set Precedent

A judge says it is plausible Top Shot Moments are securities, and the decision could change the entire NFT industry


NBA Top Shot modified by Blockworks


Dapper Labs may not get its way in the class action lawsuit against its Top Shot NFTs, and other projects should be on notice, attorneys say. 

Counsel from Skadden, Arps, Slate, Meagher and Flom LLP said that the court’s decision last week to allow the class action, alleging Top Shot moments are securities, to move forward foreshadows how NFTs may be treated in the future. 

US District Judge Victor Marreo determined the plaintiff’s argument — that Dapper Lab’s NBA Top Show Moments passes the Howey Test —- is plausible. But ruling against dismissal does not in and of itself signify any ruling, attorneys said. 

The Howey Test has four main pillars to determine whether an asset is a security: 

  • Has money been invested? 
  • Is it a common enterprise? 
  • Is there a reasonable expectation of profit?
  • Is the profit derived from the efforts of others?

There was an undisputed investment of money, Dapper Labs and the plaintiffs agree, and, Marreo said in the filing, it could be conceived that there was a pooling of funds as Moments sales created revenue and supported the Flow blockchain, which has its own native token, FLOW.

As for reasonable expectation of profits, it is feasible that Moments values were determined by Dapper Labs’ ability to turn a profit, Marreo said.

A key factor in the case is going to come down to Dapper Lab’s sole control over the marketplace where Moments were bought and sold, giving Dapper the ability to “significantly, if not entirely, dictate[d] Moments’ use and value.”

“This aspect of the court’s ruling highlights the potential regulatory risks of a ‘walled garden’ business model where the NFT issuer creates its own marketplace that serves as the only place for buyers and sellers to trade,” attorneys wrote in a contributed piece to Columbia Law School’s blog. 

The plaintiffs, in their allegations, argued Moments’ royalty structure makes them a horizontal commonality, meaning there was a “pooling of funds tied to the success of the overall venture.” Plaintiffs also said Dapper is operating a vertical commonality because it collects a percentage on each sale. The court agreed there was adequate evidence to the horizontal commonality argument, but not the vertical commonality allegations. 

“The court held that the presence of seller royalties not directionally linked to an NFT holder’s profits or losses is insufficient, by itself, to establish vertical commonality between the promoter and purchasers — a ruling that could have broader ramifications given the near-ubiquity of royalties in the NFT market,” the attorneys wrote. 

There is legal precedent to accept both types of commonalities as evidence an asset is a security, attorneys at Winston and Strawn noted

It is unclear whether the case will proceed to trial or if a settlement may be reached. A precedent could be set.

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