A new lawsuit charges that the sale of NBA Top Shot “Moments” violates the federal Securities Act of 1933, a law designed to both safeguard investors in the purchase of publicly offered securities and deter fraudulent acts in the marketing of those securities. Dapper Labs, a Vancouver-based blockchain company that has partnered with the NBA, and its CEO, Roham Gharegozlou, are accused of illegally selling unregistered securities. The company, however, has a number of defenses that it can and likely will offer in future court filings.
A group of attorneys from the Rosen Law Firm filed the complaint in a New York trial court on May 12 on behalf of Jeeun Friel, a Virginia resident who has purchased NBA Top Shot Moments. She hopes her lawsuit can be expanded to include others who have also purchased Moments since June 15, 2020. Whether the court certifies her lawsuit as a class action would be determined in future proceedings (certification is not automatic and is based on, among other factors, whether putative class members share enough in common to be joined in one case).
Friel demands a jury trial and the awarding of “significant damages” to her and her would-be class members, a group that would feature a large number of allegedly manipulated buyers. To that end, the complaint asserts many “lack the technical and financial sophistication necessary to have evaluated the risks associated with their investments in Moments and were denied the information that would have been contained in [security registration materials].”
Dapper Labs had some success with its previous blockchain project, CryptoKitties, in 2017, pushing the technology to its limits. It built its own blockchain technology, Flow, and partnered with the NBA before releasing Top Shot, which is still technically in beta, to the public last October.
Many new users learned about NFTs for the first time through Top Shot, which used the digital asset technology to sell packs of limited-edition NBA highlight clips. The product took off in February, with single digital moments selling for over $100,000. According to cryptoslam.io, Top Shot has hosted more than five million transactions worth over $580 million. At one point, the total market cap neared $2 billion.
In March, Dapper announced a $305 million funding round at a $2.6 billion valuation, which would make it more valuable than a number of NBA franchises. The Warriors and Hornets have since released their own NFTs.
In the lawsuit, Dapper is portrayed as unlawfully devising a deceptive marketplace for the sale of NFTs that feature LeBron James dunks and other attention-grabbing NBA highlights. An owner of a Moment, the complaint asserts, “does not acquire any intellectual property rights or rights to the underlying NBA highlight.” Meanwhile, the complaint charges, Dapper exploits investors by selling digital packs of Moments with pricing based on scarcity—with investors having to “wait in a virtual queue” to buy.
Dapper is also accused of “preventing investors from withdrawing their funds for months on end,” thereby “propping up the market for Moments as well as the overall valuation of NBA Top Shot.” Similarly, the company is depicted as highly restrictive in the sale of Moments, with owners relegated to selling on a secondary market where Dapper receives a 5% transaction fee.
These alleged activities are legally problematic, the complaint contends, because “Moments are securities because they constitute an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” The complaint’s classification of Moments as securities is predicated on Friel’s attorneys’ interpretation of a Securities and Exchange Commission publication titled, “Framework for ‘Investment Contract’ Analysis of Digital Assets.” The Framework, they claim, indicates that a digital asset functions as a security when “there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts.” Here, the complaint charges that investors who purchase Moments become “passive participants” in an enterprise where “the profits [and risks] of each investor [are] intertwined with the fate of NBA Top Shot.”
Allegations contained in a complaint are only that: allegations. Dapper will answer the complaint and likely deny any claims of unlawful conduct. The company is poised to offer a very different analysis of securities law in the context of Moments.
Keep in mind, the complaint’s assessment of securities is based on the attorneys’ reading of arguably relevant materials. It is not based on a conclusion offered by the Securities and Exchange Commission or a court. Expect Dapper to insist it has acted lawfully and transparently, providing consumers a product they find compelling enough to buy.
Dapper could raise other types of defenses, as well. It could dispute whether New York is the appropriate forum to hear Friel’s lawsuit. The complaint maintains Dapper, which has partnered with the N.Y.-headquartered NBA, employs several people in New York. Yet Dapper is also based in Canada. Meanwhile, Friel is a resident of Virginia.
YOU ARE AGREEING TO GIVE UP ANY RIGHTS TO LITIGATE CLAIMS IN A COURT. OTHER RIGHTS THAT YOU WOULD HAVE IF YOU WENT TO COURT MAY ALSO BE UNAVAILABLE OR MAY BE LIMITED IN ARBITRATION.
YOU HEREBY EXPRESSLY GIVE UP YOUR RIGHT TO HAVE A TRIAL BY JURY.
YOU HEREBY EXPRESSLY GIVE UP YOUR RIGHT TO PARTICIPATE AS A MEMBER OF A CLASS OF CLAIMANTS IN ANY LAWSUIT, INCLUDING, BUT NOT LIMITED TO, CLASS ACTION LAWSUITS INVOLVING ANY SUCH DISPUTE.
Binding Arbitration. All disputes arising out of or in connection with this contract, or in respect of any defined legal relationship associated therewith or derived therefrom, shall be referred to and finally resolved by arbitration under the International Commercial Arbitration Rules of Procedure of the Vancouver International Arbitration Centre . . . the place of arbitration shall be Vancouver, British Columbia, Canada.
While binding arbitration agreements can sometimes be defeated if viewed as hidden, oppressive or outside the scope of a legal claim, they are often enforced. This clause, with its use of bold and all caps, appears to be displayed prominently in the agreement.