The lawsuit alleges that the NBA’s platform sold securities and did not respect securities law by doing so, while profiteering $500m in the process.
- Dapper Labs made its name in 2017 by issuing the Crypto Kitties. These are programs, which allow their owners to breed and collect digital cats, is using the ‘Proof-of-Work” mining concept. It then released a new technology called “Proof-of-Stake” to reduce the computational impact of the technology. In 2019 Dapper Labs announced its cooperation with the National Basketball Association to launch a digital platform for the “NBA Top Shots” called “Moments”. It also issued the Flow cryptocurrency, which qualifies as a security according to its distribution mechanism (to US investors), but was not registered as such.
- In April 2019, the SEC indicated that federal securities laws would apply to the sale of digital assets, if the Howey test is matched:
- Three months later, the NBA Top Shot platform minted various NBA events, in limited editions (up to 100 copies, or up to 1000 copies, or more copies, depending on the rarity segment), on the flow blockchain.
- The assets cannot trade away from Dapper Labs, which collects 5% of all future sales.
- The Rosen Law Firm alleges that the assets meet the Howey test and are therefore securities:
- The plaintiffs have exchanged money for a consideration worth of value.
- Also the purchases consideration “derives their value from the success or failure of a given project, promoter, or start-up”.
- Moreover, the defendants prevented investor from cashing out, because it is not helping owners to find new purchasers and even if they do, Dapper is not wiring cash back for weeks and months.
- Interestingly, although the the plaintiff is in Virginia, the defendants is a Canadian corporation headquartered in Vancouver Canada, with an office and personnel in New York. The defendant is also the partner of the NBA, headquartered in NY. The geographies of the direct parties naturally opens questions about the jurisdiction of the venue.
The case will certainly be followed going forward.
You will find explanations on the nature of NFT in our article Non-Fungible Tokens, in Non Fungible Markets.
The suit was filed on 5/13/21 in NY County (653134/2021). The plaintiffs are represented by Philip Kim, Laurence Rosen and Michael Cohen at the Rosen Law firm.