NBA’s ‘Top Shot’ NFTs Are Securities, Judge Rules in Dapper Labs Case

  • Feb 23, 2023 at 6:34 am
  • In recent years, the world of blockchain and cryptocurrency has introduced new and innovative ways to monetize digital assets. One such innovation is the emergence of non-fungible tokens (NFTs), which are unique digital assets that are stored on a blockchain. One area where NFTs have gained significant traction is in the world of sports, with the National Basketball Association (NBA) launching its own NFT platform called Top Shot. However, a recent ruling by a US judge has added a new layer of complexity to the world of NFTs, with Top Shot being ruled as securities.

    The NBA’s Top Shot platform allows fans to buy, sell, and trade NBA highlights, or “moments,” as NFTs. These moments are essentially short clips of NBA games, packaged as unique digital assets. Fans can purchase these moments either individually or in packs, with some of the most valuable moments selling for hundreds of thousands of dollars.

    However, in March 2021, a class-action lawsuit was filed against Top Shot creator Dapper Labs, alleging that Top Shot moments were unregistered securities. The lawsuit argued that the moments were essentially investments in a company, with the value of the moments being tied to the success of the Top Shot platform.

    In late February 2022, US District Judge Richard Seeborg agreed with the plaintiffs, ruling that Top Shot moments are indeed securities under US law. Judge Seeborg’s ruling was based on the Howey Test, a legal framework used to determine whether an asset is a security. The Howey Test requires that an asset meets four criteria to be considered a security: it must be an investment of money, in a common enterprise, with the expectation of profits, solely from the efforts of others.

    According to Judge Seeborg, Top Shot moments meet all four criteria of the Howey Test. Fans are investing money in the moments, which are part of a common enterprise (the Top Shot platform), with the expectation of profits based on the success of the platform, and the value of the moments is tied solely to the efforts of Dapper Labs.

    The implications of this ruling are significant for the world of NFTs. By ruling that Top Shot moments are securities, Judge Seeborg has essentially classified all NFTs as potential securities. This could have far-reaching consequences for other NFT platforms, which may now have to register their NFTs with the Securities and Exchange Commission (SEC) and comply with securities regulations.

    It remains to be seen how the NFT industry will react to this ruling. Some may argue that NFTs are not securities because they are unique digital assets rather than traditional investments. However, Judge Seeborg’s ruling highlights the need for greater clarity and regulation in the world of NFTs. As the use cases for NFTs continue to evolve, it is likely that we will see further legal challenges and regulatory scrutiny.