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Judge Dismisses Dapper Labs Motion, Allows NFT Class Action to Proceed

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Blog

Judge Dismisses Dapper Labs Motion, Allows NFT Class Action to Proceed

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2 Min Read

Author

George Mastoris

Related Locations

Los Angeles
New York

Related Topics

Regulations
Securities and Exchange Commission (SEC)
Non-Fungible tokens (NFTs)
Howey Test

Related Capabilities

Class Actions & Group Litigation
Securities, M&A & Corporate Governance Litigation
Cryptocurrencies, Digital Assets & Blockchain Technology
Technology, Media & Telecommunications
Sports

Related Regions

North America

February 24, 2023

On February 22, 2023, the Southern District of New York denied a motion to dismiss (the Motion) by blockchain company Dapper Labs and its CEO Roham Gharegozlou. Dapper Labs is behind the “NBA Top Shot Moments” (Moments) Non-Fungible Token (NFT) collection and also controls the private Flow blockchain network, on which the NFT transactions occur via the exclusive FLOW tokens.[1]

In a May 2021 class action suit by investors who had purchased Moments NFTs, plaintiffs alleged that Dapper Labs had violated federal securities laws in neglecting to register Moments with the U.S. Securities and Exchange Commission. Dapper Labs responded by filing a motion to dismiss on the grounds that Moments – which capture NBA highlights – are not securities but rather tradable goods along the lines of digital basketball cards.

In denying the Motion, Judge Victor Marrero held that plaintiffs had adequately alleged that Moments constitute investment contracts under the four-prong test first articulated in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (and thus securities within the meaning of the Securities and Exchange Acts). Under the Howey test, a given transaction comprises an investment contract if it involves 1) an investment of money, 2) a common enterprise, and 3) a reasonable expectation of profits that are 4) derived from efforts of others.[2] The Court noted that Moments are dependent on the existence of the Flow blockchain and FLOW tokens, which are privately maintained by Dapper Labs, and that the interplay between the two “is necessary to the totality of the scheme at issue.”[3] Further, Plaintiffs had alleged that Dapper Labs had promoted Moments concurrently with its own marketplace on which it hoped purchasers would “realize substantial profits through the low sale prices,” thus creating the expectation of profit based on Dapper Labs’ own efforts.[4]

Based on the above analysis, the Court allowed Plaintiffs’ complaint to proceed. However, it did take care to note that its holding was “narrow” and that “not all NFTs offered or sold by any company will constitute a security.” Rather, according to the Court, the question of whether a given digital asset or NFT does constitute a security must be resolved on a “case-by-case basis.”[5]

Please contact your Winston relationship partner should you have any questions or to request further information. We will continue to monitor developments and provide friends of the firm with updates as they become available.


[1] https://www.law360.com/assetmanagement/articles/1578864/nba-tied-crypto-co-can-t-dodge-unregistered-securities-suit; Friel v. Dapper Labs, Inc., 2023 U.S. Dist. LEXIS 29176

[2] https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets; SEC v. W.J. Howey Co., 328 U.S. 293 (1946)

[3] Friel v. Dapper Labs, Inc., 2023 U.S. Dist. LEXIS 29176

[4] Id.

[5] Id.

Related Professionals

Related Professionals

George Mastoris

George Mastoris

This entry has been created for information and planning purposes. It is not intended to be, nor should it be substituted for, legal advice, which turns on specific facts.

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