The Key Points

A U.S. federal judge recently noted that Dapper Labs’ NBA Top Shot’s Moments NFT “Moments NFT”, meets the criteria to be considered securities after applying the Howey test.

The U.S. District Court’s most recent decision states that the NBA Top Shot NFT may satisfy security criteria.

Other than NBA Top Shot, NFT executives and initiatives have also been investigated.

NFT projects are now facing the “soul torture” of securities certification after the U.S. regulators put a stop to encrypted businesses like pledges and stablecoins. A U.S. federal judge recently pointed out that Dapper Labs’ NBA Top Shot’s Moments NFT meets the criteria to be considered securities after applying the Howey test. Dapper Labs has not yet commented on the matter.

A U.S. federal judge could rule that NBA Top Shot is a security risk

The U.S. District Court has ruled that the NBA Top Shot NFT may be considered security after applying the Howey test. According to court documents, Victor Marrero, U.S. Federal Judge, accused the company of violating Sections 5, 12 and 13 of the Securities Act by selling NBA Top Shot Highlights NFTs without the standard registration and disclosures applicable for other investment contracts.

According to the rulings, although Dapper Labs’ token FLOW may not be necessarily secure in its own right, it is necessary for the scheme as a whole. The plaintiffs claim that transactions on the FLOW blockchain cannot, without FLOW tokens. FLOW is required to power Flow’s POS mechanism and to incentivize miners verifying transactions.

Victor Marrero cited U.S. Securities and Exchange Commission lawsuit against Kik Interactive and Telegram and U.S. Department of Justice case versus Maksim Zaslavskiy to show that Dapper Labs controls Flow blockchain and the “wonderful minute NFT” in the transaction. FLOW’s value is maintained and developed through the sales and transactions on the platform as well as the funds raised from these transactions.

Marrero also believes that Dapper Labs used emoticons (such a rocket, money bags, etc.) to determine whether interest expectations exist. Some tweets promoted NFT, suggesting that these assets would increase in value. He also noted that the ruling is only applicable to “excellent moment NFTs” but may not be applicable to other NFTs. NFTs sold by companies do not all constitute securities. Therefore, each case must be considered individually.

This ruling is actually a result of a lawsuit filed in New York in May 2021 by Dapper Labs CEO Roham Gharegozlou. Dapper Labs and Roham Garizlou were sued by Jeeun Friel, a NBA Top Shot user, alleging that the NFT that he sold was not registered. The plaintiff also claimed that Dapper Labs should have registered the NFT with the US Securities and Exchange Commission. However, the latter doesn’t.

Separately, the plaintiffs claim that NBA Top Shot was used to prevent collectors from withdrawing funds “for months” in order to artificially boost the platform’s market price. These accusations are based on only the plaintiff’s “personal information.”

Roham Gharegozlou, who dismissed the lawsuit and argued its NFT was not a security since its value doesn’t come from any external investments, was not able to agree with the statement of the judge. This ruling could also open the door to Dapper Labs’ class-action lawsuit. Dapper Labs has currently three weeks to respond.

NBA Top Shot is a very popular NFT project that has been not only officially authorized by the NBA, but has also been endorsed by many famous stars. It has also received a huge amount of financing. According to Cryptoslam data on February 25, NBA Top Shot had a total transaction volume exceeding $1.05 billion and a record number of buyers.

It will be a significant impact on the industry if NBA Top Shot is the first NFT project to be sued for “selling unregistered security”

The pace of NFT regulatory review accelerations

The NFT market is growing in size and user groups are becoming more diverse. This has led to increased attention to its risk. However, supervision is still in an exploratory stage. There are many NFT executives and projects that have been investigated and brought to justice, including NBA Top Shot. Take, for example:

Yuga Labs

The US SEC opened an investigation in October 2022 to determine if Yuga Labs’ NFT Series are similar to stocks and must follow the same disclosure rules. Also, to determine whether ApeCoin (APE), is a security and whether distribution violates federal laws. Yuga Labs was not accused of wrongdoing and the SEC investigation does not mean that they will sue the company.

OpenSea

In August 2022, Damian Williams (the U.S. Attorney in the Southern District of New York) and Michael J. Driscoll (Assistant Director of the New York Field Office of FBI) announced the indictment of Nate Chastain. He was the former head of product for OpenSea. The charges relate to wire fraud and money laundering.

The U.S. Department of Justice brought wire fraud charges against Chastain because of uncertainty over whether NFTs were securities. Chastain is subject to a maximum 20-year sentence if convicted of wire fraud or money laundering.

Justin Bieber and Snoop Dogg, Stephen Curry and Kevin Hart, Madonna, as well as other celebrities, were also sued for their promotion of Bored Ape Yacht Club. NFT has been included in the US regulators’ supervision due to an increase in NFT-related cases.

The SEC began investigating whether NFT creators or encrypted exchanges that provide NFT transaction services violate regulatory requirements as early as March 2013. Subpoenas were issued to certain NFT creators as well as cryptocurrency trading platforms. This investigation focuses on fragmentation NFT. Hester Peirce, the SEC Commissioner, also warned that NFT projects should be cautious due to regulatory ambiguity.

Today, the New York State Attorney General Letitia Jam sued CoinEx, claiming it sold securities and commodities without being registered in New York State. Judging by the accusations of this non-top cryptocurrency exchange that originated from China, even though it is not a US project, it will be regulated by the US long arm jurisdiction if it has US investors.

This means that NFT creators will have to assess whether they are complying with regulatory requirements before granting projects. Existing NFT projects should also be evaluated to see if they can improve their business compliance in order to reduce the risk of being sued.

DISCLAIMER: This website provides general market commentary but does not constitute investment advice. We encourage you do your research before you invest.

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Harold

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