Basketball Moments NFT's Creator Faces Lawsuit Over Security Status

Despite a judge's ruling declining to dismiss the lawsuit against the company that created the marketplace for the National Basketball Association's Top Shots NFTs, the company must now face a lawsuit accusing it of selling unregistered securities.

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A lawsuit filed by Dapper Labs in the year 2021 alleges that the company violated US securities law by offering Top Shot Moments — digital video clips of highlights from NBA games — without registering them with regulators and by using its control over the collectibles to prevent investors from withdrawing their funds.

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Dapper Labs' request to have the lawsuit thrown out before trial was denied by US District Judge Victor Marrero on Wednesday. The judge found that the plaintiffs had sufficiently alleged that Moments are securities, under the relevant legal standard, for the case to proceed, and thus, he allowed the case to proceed. According to Marrero, Moments is the company's token that can only be traded on its Flow blockchain, so purchasers are dependent on Dapper's expertise and management in addition to its continued existence in order to purchase Moments.

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“In the event that Upper Deck or Topps, two longtime producers of physical sports trading cards, were to fail, the value of the cards they sold would, hypothetically, be unaffected and would even increase, much like the value of art that has been discovered after someone's death," Marrero wrote in his article. “The plaintiffs argue that this is not true here since the plaintiffs claim that money generated from the sale of Moments was used to prop up the Flow Blockchain, and the value of Moments is intertwined with the success of that blockchain and Dapper Labs."

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The case is far from over, according to Dapper.

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There is no final ruling on the merits of the case and, according to the spokesperson for the company, Stephanie Martin, the judge "did not conclude that the plaintiffs were right". The Federal Securities and Exchange Commission has repeatedly held that consumer goods, including art and collectibles such as basketball cards, do not qualify as securities under federal law. “In our opinion, the same holds true for Moments and other collectibles, whether digital or otherwise, and we look forward to vigorously defending our position in court as the lawsuit continues.”

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It is believed that this decision is the first to address whether nonfungible tokens are securities, according to Marrero. While saying that this does not necessarily mean all NFTs are securities, he cautioned that they must be assessed on a case-by-case basis and that it is the way Dapper offers Moments that makes the asset different from the rest.

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The judge stated that Dapper Labs has a substantial amount of control over the Flow Blockchain, which dictates the use and value of Moments in a significant, if not entirely, way. The judge continued by noting that Dapper offered Moments as a way for purchasers to realize substantial profits through the sale of packs at low prices and the marketing of the substantial profits made by others through the sale of packs on Dapper's proprietary marketplace, among other things.

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Moments would be worthless without Dapper's "essential efforts in maintaining the Flow Blockchain and Marketplace," he stated.

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