In recent years, NFTs (Non-Fungible Tokens) have exploded onto the scene, capturing the imagination of digital art collectors, investors, and even casual fans of pop culture. Yet, despite the immense hype surrounding NFTs, the landscape for digital assets has shifted dramatically.
After being a hype in 2021, the popularity around NFTs has deflated a little. Nonetheless, there is one genre that has always been able to attract a steady audience: sports. This leads us into an NBA Top Shot world and its case within the Dapper Labs lawsuit.
What Is Dapper Labs and NBA Top Shot?
Dapper Labs, a tech startup that produced NBA Top Shot, received worldwide attention after building one of the most successful products based on blockchain in the realm of NFTs.
With partnerships with the National Basketball Association (NBA), Dapper Labs had released NBA Top Shot in 2020, offering fans to buy, sell and trade NFT Moments. The NBA Top Shot Moments are basically NBA game highlights in digital form and they are converted into collectibles that can be traded as an NFT.
Yet, even though NBA Top Shot started with success, it quickly found itself in the core of the lawsuit, which means that there are legal struggles involved that have deep ramifications on the NFT itself and blockchain technology. The Dapper Labs litigation centers on what NBA Top Shot Moments are and whether they can be defined as securities in the terms of the U.S. federal laws, an idea that might redefine the future of digital assets such as NFTs as well.
The Decline of NFT Popularity and the Persistence of NBA Top Shot
Although there was a wide fluctuation and a significant decline in the NFTs hype cycle, NBA Top Shot stood in a different position in the sports fraternity. As far as basketball fans, the platform was seen as the possibility to have something of their loved sports moments as collecting trading cards though the version was digital.
Nevertheless, even after the boom in popularity NBA Top Shot still managed to keep interest among its devoted audience, although NFTs, as a whole, lost their status as a buzzword in the mainstream. The regularity to attract a loyal user base in this platform led to the Dapper Labs lawsuit, which is the result of the investors themselves that had spent their money buying NBA Top Shot Moments as part of the ecosystem early success.
Why Did the Dapper Labs Lawsuit Even Start?
In May 2021, a group of investors sued Dapper Labs on an unregistered securities class action alleging that NBA Top Shot Moments are subject to that regulatory framework in the United States.
The conceptual issue at stake in this legal dispute is whether the NBA Top Shot Moments constitute an investment contract. In a nutshell, the plaintiffs argue that these Moments resemble a stock or bond, characterized by an appreciation/depreciation rate tied to Dapper Labs‘ price and marketing policies, rather than traditional digital collectibles.
The Legal Claim: Moments as Investment Contracts
So, why did these investors take this legal step? According to the plaintiffs, when they purchased NBA Top Shot Moments, they weren’t just buying digital collectibles; they were making an investment. Just as stocks rise and fall based on the success of the company behind them, NBA Top Shot Moments saw a rise in value due to the platform’s popularity and marketing efforts.
The investors felt that Dapper Labs created an environment where Moments functioned similarly to securities. As a result, they believe Dapper Labs violated U.S. federal securities laws by failing to register NBA Top Shot Moments as securities with the Securities and Exchange Commission (SEC). For context, the Howey Test—a legal framework used to determine whether something qualifies as a security—played a central role in the case. The key parameters of the Howey Test include:
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Investment of Money: Investors bought NBA Top Shot Moments for a financial stake.
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Common Enterprise: The success of the platform as a whole affected the value of individual Moments.
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Expectation of Profits: The investors expected their Moments to increase in value.
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Efforts of Others: The promotion of the platform and the blockchain technology were controlled by Dapper Labs.
The Court’s Role in the Lawsuit
The Dapper Labs lawsuit gained traction in early 2023 when Judge Victor Marrero of the Southern District of New York denied Dapper Labs’ motion to dismiss the case. The judge ruled that the plaintiffs had presented sufficient evidence to proceed with the lawsuit.
In his ruling, Judge Marrero noted that the plaintiffs adequately alleged that Dapper Labs’ NBA Top Shot Moments were in fact investment contracts, thus potentially qualifying as securities that should have been registered with the SEC.
This ruling became a turning point in the trial, as it enabled the case to proceed and highlighted the regulatory consequences that the NFT industry may generally expect. This pioneer case motivated investors by demonstrating that the legal system treats NFTs and other digital assets of the same scope as traditional financial instruments.
How This Lawsuit Could Shape the Future of NFTs
The fate of the Dapper Labs lawsuit is bound to have a significant impact on the future of NFTs as the case progresses. Should the court ultimately decide that NBA Top Shot Moments are securities, this would pave the way to the possibility of other lawsuits of this kind in additional NFT markets, bringing them to the forefront of regulatory inspection via the SEC.
In the case of Dapper Labs, the lawsuit serves as a reminder that a hiatus is imminent, given the platform’s similarity to an investment marketplace rather than a digital collectibles provider. The company has not resolved the case but is opting to defend the case on the idea that NBA Top Shot Moments are mere digital cards that can be termed as trading cards and not securities.
Conclusion
The Dapper Labs lawsuit is a noteworthy case that brings up the question of the interplay between blockchain technology and regulatory authority concerning securities laws that exist within the world of NFTs.
Although the NBA Top Shot remains a successful product among customers who like basketball, the future of legal issues regarding the latter may define the whole world of digital assets. As the case continues, the lawsuit faced by Dapper Labs will probably become one of the references to future judicial conflicts related to NFTs.
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