In a recently filed motion to dismiss, the company behind NBA Top Shot “Moments” insists its digital basketball cards are not securities and are instead like trading cards, coins and other collectibles.
Dapper Labs, a Vancouver-based blockchain company that has partnered with the NBA, is accused of violating the Securities Act of 1933 by marketing and selling “unregistered securities.” Jeeun Friel v. Dapper Labs could reshape the nascent marketplace for non-fungible tokens in sports.
Top Shot uses digital asset technology to sell packs of limited-edition and attention-grabbing NBA highlight clips, such as dunks by LeBron James or three-pointers by Jayson Tatum. These “Moments” can be bought in packs and then traded, gifted or sold.
According to Friel, a Virginia resident who seeks to represent all who purchased or otherwise acquired Moments from June 15, 2020, to the present, Moments operate like stocks, bonds, mutual funds and other financial instruments that courts recognize as securities. Moments, like other securities, allegedly entail an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts.”
If Moments are securities, Dapper’s business practices for Moments must adhere to the Securities Act, which strictly regulates the marketing and sale of securities. They are also subject to oversight by the Securities and Exchange Commission.
Friel’s complaint charges that investors of Moments—Dapper calls them purchasers—are denied protections mandated by the Securities Act. Investors, for example, are allegedly deprived of risk analysis and disclosure materials. Investors might not realize or appreciate they “do not acquire any intellectual property rights or rights to the underlying NBA highlights.”
Dapper, which is represented by Paul Hastings attorneys, maintains in a memorandum filed in the Southern District of New York on Aug. 31 that Friel misunderstands securities law.
Dapper categorizes Moments as a type of collectibles that offers “digital alternatives to physical sports cards,” which, like Pokémon cards, are not securities. Dapper mocks the idea that “a clip of a LeBron James dunk should be subject to the same registration and disclosure requirements as a share of Apple stock.” To that end, Dapper cites case law where rare coins, gold coins, artwork, lithograph plates and other collectibles were deemed non-securities. “We should not try to turn every ‘thing’ which might be purchased and sold into a security,” one SDNY judge wrote in 1985.
Also highlighted is the active role played by Moments’ purchasers, who buy packs and specific players’ cards and often then trade, gift or sell them in a community of other NBA fans. Purchasers are not, Dapper insists, “passive investors,” for whom courts have expressed securities laws were enacted. Friel, in contrast, portrays purchasers as passive investors in an enterprise where profits and risks “of each investor” are “intertwined with the fate of NBA Top Shot.”
Dapper’s memorandum further asserts the company neither markets Moments as carrying an expectation of profits—as is common with securities dealers—nor can it unilaterally alter Moments’ market value. While Dapper’s marketing efforts can impact prices, such marketing cannot control “whether a Rookie of the Year favorite will suffer an injury, increasing interest in his primary competitor, or whether that favorite will instead return to play, reversing the trend, as happened with LaMelo Ball and Anthony Edwards,” Dapper points out. Further, Dapper charges that Friel fails to offer case law to support “the theory that the seller of sports cards becomes an issuer of securities simply because it sells only a certain number of those sports cards initially.”
The case is before Judge Victor Marrero, and Friel seeks a class-action jury trial. Whether the case survives Dapper’s motion to dismiss and advances towards a trial will take months to determine.
While Friel and Dapper battle in court, the SEC has a stake in the litigation. The agency’s “Framework for ‘Investment Contract’ Analysis of Digital Assets” offers a schema on whether the sale of a digital asset ought to be classified as a security transaction. One relevant factor, the SEC notes, is scarcity—a relevant point in regard to Moments as their numbers are capped. Dapper, however, tries to downplay the Framework as carrying “effectively no precedential weight” because it cites no case law and constitutes a “non-binding agency interpretation” rather than a “a rule, regulation, or statement of the Commission.”
NBA Top Shot played a key role in popularizing blockchain-based collecting early in 2021, when fans waited hours in online queues for packs. Some individual “Moment” NFTs sold for more than $100,000 each. However, many of the NFTs saw their values plummet in the following months. Amid the frenzy, tools and content creators offered ways for people to track the value of their Top Shot portfolio, spot potential profit opportunities or measure the estimated market cap of the entire platform.
As new Moments continue to be bought and sold, the platform recently crossed $1 billion in total transactions. Dapper Labs has also signed deals with Spanish soccer’s LaLiga, the NFL and UFC. The company, which also operates the Flow blockchain, reached a $7.6 billion valuation last fall when it raised $250 million. Dapper Labs CEO Roham Gharegozlou has repeatedly expressed his long-term goal of getting “a crypto wallet in everybody’s pocket.”