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Do non-traditional financial instruments (NFTs) count as securities? After a Top Shot collector sues Dapper Labs for allegedly selling NFTs as unregistered shares, Redditors debate the problem.
Dapper Labs and CEO Roham Gharegozlou are being sued by a platform user for allegedly selling NFTs as unregistered securities.
Plaintiff Jeeun Friel sent a summons to Dapper Labs last week, asking the corporation to respond to a lawsuit claiming the company traded unregistered shares through the NBA Top Shot marketplace — in the form of tokenized NBA highlight collectibles.
The plaintiff also alleges that NBA Top Shot intentionally prevented collectors from withdrawing funds for “months on end” to artificially prop up the market value on the platform — pointing to a CNN article from April titled “NBA Top Shot customers can’t get their money out. Experts are confounded.”
The outcome of the lawsuit may be decided by the Howey Test — which determines whether a financial transaction qualifies as an “investment contract” and therefore considered a security.
According to U.S Securities and Exchange Commission, or SEC, an investment contract “exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others”
The complainant would not allege that Dapper Labs marketed the NFTs as investment properties, despite the fact that the firm’s user agreement requires collectors to agree that they “are using NFTs primarily as objects of play and not for investment or speculative purposes.”
The complainant does allege, however, that the platform led investors to “expect profit” from its publicity materials, which hyped the platform’s popularity, as well as its built-in scarcity for certain NFTs that are extremely lucrative and fetch six-figure amounts.
According to data from Cryptoslam, NBA Top Shot’s secondary peer-to-peer market hosts more than $900,000 worth of trades daily, according to a 30-day rolling average.
News of Dapper Labs being sued sparked a spirited debate in the r/nbatopshot subreddit.
User “nftaddct” noted they personally “don’t feel like Moments are securities”, however, the court might not view it that way:
“Securities have a broad definition. Apparently, Roham himself referred to “investing in Moments” during some of the office hours. This was pointed out in a thread over the weekend.”
Redditor “WhyAlltheHubbub” who claimed to be a “lawyer, but not a securities expert” commented:
“I’d be shocked if legally these are classified as securities. That said, the ability to pursue discovery and see if there is anything nefarious going on related to slowing the withdrawal process would be interesting.”
According to Reddit user “FartyMcPoopyBalls,” the platform’s securities argument can fall short because the platform “has never marketed their NFT’s ability to turn a profit.” They’ve always spoken about collectibility, and they’ve always compared Top Shots to trading cards.”
Lewis Cohen, co-founder of the blockchain-focused boutique law firm, DLx Law told Forbes regardless of the outcome, this case could set a precedent for other NFT marketplaces in the future:
“If this is the new standard for ‘investment contracts’ there are many other businesses out there that should start worrying.”
Dapper Labs has 30 days to respond to summons and are yet to publicly comment on the allegations.