A U.S. district court judge on Wednesday denied Dapper Labs’ request to dismiss a lawsuit that alleges that the NBA Top Shots non-fungible token (NFT) collection is an unregistered security. 

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Fast facts

  • District Judge Victor Marrero wrote that the Dapper Labs’ NFT collection appears to meet the requirements of a security under the Howie Test — named after a landmark U.S. Supreme Court case to determine if an asset could be deemed a security.
  • NBA Top Shots was one of the break-out NFT collections in 2021 and is in the top 10 collections of all time by sales volume. The project allows users to collect “Moments,” or NFTs in the form of video highlights from the National Basketball Association.
  • In May 2021, Dapper Labs was sued by a plaintiff who alleged that the Top Shots collection is an unregistered security. By failing to register them with the Securities and Exchange Commission (SEC), Dapper Labs violated securities law and harmed her and other consumers.
  • “If Upper Deck or Topps, two longtime producers of physical sports trading cards, were to go out of business, the value of the cards they sold would be wholly unaffected, and may even increase, much like posthumously discovered art,” Judge Marrero wrote.
  • “That is not true here, where plaintiffs allege that the pooling of capital generated from the sale of Moments propped up the Flow Blockchain and where the value of Moments is intertwined with the success of that blockchain and Dapper Labs.”
  • Judge Marrero added that this decision should not broadly apply to all NFTs, and each should be assessed on a case-by-case basis.
  • The development comes amid a period of heightened scrutiny in the industry. In early February, the SEC fined U.S. crypto exchange Kraken US$30 million for offering staking products, which the agency considers to be a security.

See related article: SEC’s Gensler says proof-of-stake cryptocurrencies may be securities