NBA Top Shot creator to face lawsuit around securities status

Dapper Labs, the company behind many popular NFT collectible projects, will face a lawsuit accusing it of selling unregistered securities. In particular, the company has developed the popular NFT game NBA Top Shot and one of the original NFT collectible games, CryptoKitties.

A class-action lawsuit was first filed against Dapper Labs in 2021. The company filed a motion to dismiss the lawsuit before trial. And yet, as Coindesk spotted, U.S. District Judge Victor Marrero denied the request, which means that the case will go forward.

If you’re not familiar with NBA Top Shot, users can go to the website to buy digital cards that represent NBA "Moments" — those are short video clips of memorable moments. They can then buy and sell some of their cards to other players. The value of these digital collectibles can go up and down over time.

Each digital card is registered as a unique token on a blockchain. While other NFT-based games like Sorare rely on the Ethereum blockchain, Dapper Labs has decided to develop its own private blockchain called Flow. The company said that this new blockchain is optimized for scalability and practical use cases.

“The Flow Blockchain uses ‘Proof of Stake’ validation to allow the business to scale more efficiently. Dapper Labs also created a token, FLOW, which miners would be able to stake to validate transactions,” Marrero wrote in his decision.

And this is key to understanding the current lawsuit. In his conclusion, Marrero distinguishes NBA Top Shot’s Moments from other types of NFTs.

“Not all NFTs offered or sold by any company will constitute a security, and each scheme must be assessed on a case-by-case basis,” he wrote. (And Moments shouldn’t be considered as securities, either, as the lawsuit has yet to take place.)

So what makes Moments different from other NFTs? And what makes Moments different from physical sports trading cards? The fact that Moments can only be traded on the Flow blockchain means that Dapper Labs has some control on the value of those Moments.

“The NBA Top Shot Terms of Use also states that Moments have no intrinsic or inherent value outside the Flow Blockchain. […] It follows that, if, hypothetically, Dapper Labs went out of business and shut down the Flow Blockchain, the value of all Moments would drop to zero. That is the critical causal connection that other collectibles cases lack, and which is alleged here,” Marrero wrote.

Even if NBA Top Shot users try to sell their Moments, they have to go through the official secondary marketplace. “Ownership of the Moments, the price paid for the Moments, and the transfer and sale of the Moments in the Marketplace are all recorded on only the Flow Blockchain. Dapper Labs does not recognize and does not endorse Moments being sold or traded outside of the Marketplace,” Marrero wrote.

In September 2021, Dapper Labs raised a $250 million funding round with Coatue leading the investment. At the time, the company reached an impressive $7.6 billion valuation. While NFT sales have dropped quite drastically in recent months, the company managed to attract more than a million users and generate hundreds of millions of dollars in transaction volume. The company takes a cut on newly minted NFTs, marketplace transactions and cash-out transactions.

Even if not all NFTs are created equally, the case will have some wide repercussions across the industry — especially for companies using private blockchains.