On May 12, a plaintiff sued Dapper Labs, Inc. and the CEO of Dapper Labs, alleging a violation of securities laws. that of the complainant complaint alleges that Dapper Labs’ platform NBA Top Shot sold securities when it sold non-fungible tokens (NFTs) on its platform.
On the NBA Top Shot platform, users can buy and sell NFTs associated with specific NBA music videos, called “NBA Top Shot Moments”. The plaintiff claims that NBA Top Shot sold for more than $ 500 million of these tokens, which are minted by NBA Top Shot and then sold in digital packs of three varieties: common, which include NBA Top Shot Moments which were produced more 1,000 times; rare, which includes NBA Top Shot moments that have been produced up to 999 times; and legendary, which have been produced up to 99 times. The Applicant also notes that NBA Top Shot Moments can be bought and sold in the secondary market from individuals. These sales take place on the NBA Top Shot platform, and depending on compliance, Dapper Labs receives a 5% transaction fee on all transactions.
The Complainant alleges that NBA Top Shot NFTs are digital assets that “derive their value from the success or failure of a given project, promoter or start-up” and, therefore, this are securities that should have been registered with the Securities and Exchange. Commission. (Complaint, page 2). Specifically, the Applicant points to packaging the NBA Top Shot Moments in limited edition packs and requiring all subsequent sales to be made on the NBA Top Shot platform. The complainant also points out the transaction fees Dapper Labs receives and the issues with withdrawing funds from the platform once deposited there. The claimant claims that these actions result in a product that increases or decreases in value based on the actions of NBA Top Shot. Further, the complainant cites comments from others who have either reviewed the platform or purchased NBA Top Shot Moments, that these NFTs are purchased by people for investment purposes.
This was the first shot for NFT editors and the platforms that enable NFT’s secondary sales. With limited official guidance regarding NFTs, it’s safe to say that many are watching this litigation. Defendants are likely to first challenge the complaint on a procedural basis, as both defendants appear to be in Canada and may be able to claim a lack of personal jurisdiction. In addition, the plaintiff has brought an action in New York State courts, and the defendants may attempt to “return” the proceedings to federal court. Once the procedural challenges are settled (and unless a resolution is reached), this case can provide the necessary guidance to the industry – we will certainly be watching.