NBA Top Shot Lawsuit: Explained 📚
A lawsuit from 2021 has reared its head, and Moments *may* be considered securities. Here's how that works.
Big news today in our world, as the legal proceedings in a lawsuit against Dapper Labs took another step forward.
Below we have the breakdown of the story, what it means for collectors, and what this could mean for the broader NFT space.
I’ve also recorded a quick 12-min podcast explaining this, followed by a 60-minute live stream recorded earlier with Mike from Team Hold where we go through the lawsuit piece by piece. Those are blended together here:
I wrote a Twitter thread when the news first broke. Thank you to everyone who wrote in some comments and suggestions afterwards! Full thread:
And before we get to the summary, we have also received an official statement from Dapper Labs regarding the matter:
Today’s order only denied the defendants’ motion to dismiss the complaint. It did not conclude the plaintiffs were right, and it is not a final ruling on the merits of the case. Courts have repeatedly found that consumer goods – including art and collectibles like basketball cards – are not securities under federal law. We are confident the same holds true for Moments and other collectibles, digital or otherwise, and look forward to vigorously defending our position in Court as the case continues.
Here’s the full story.
The First Mint and LG Doucet are not legal experts, nor financial experts. All the information contained here is being re-transmitted from court documents and news articles, and broken down to the best of our abilities.
NBA Top Shot Lawsuit: Explained 📚
Earlier today, major news hit the crypto airwaves: NBA Top Shot Moments may be considered securities.
However, the initial batch of news was somewhat misleading. Many outlets reported that Moments WERE considered securities, when in fact that has YET to be determined.
What the judge actually decided would be that a motion to dismiss a lawsuit - one where plaintiffs are accusing Dapper Labs of selling unapproved securities via Top Shot Moment - would not go ahead. The motion to dismiss was from Dapper Labs, asking the Judge to ignore the lawsuit, and the Judge has basically said no way and wants to proceed with it.
But again - this does not mean that Moments are securities. Rather, it means the case to figure out if they were sold as securities will move ahead, despite Dapper’s objection.
Why Moments Could Be Considered Securities
There are multiple layers to the lawsuit, and all of them point back to a few key items. First I’ll explain what those are, and afterwards we’ll look at the Howey Test, which is a system designed to identify securities.
Here is what is being claimed by the plaintiffs as to why Moments could be securities:
Buying Moments was equal to investing in Flow blockchain
The plaintiffs and judge are basically saying that Dapper was using the Moment revenue to continue to build out FLOW. This is not illegal. All companies use profit to build infrastructure.
The part that’s an issue is where the value of the assets being sold (the Moments) is directly tied to the product being built. Meaning that we as consumers are buying an asset whose success is dependent on our funds.
An example used here is where the price of Moments would go down when the Marketplace would go down. Meaning the value of consumer assets was directly tied to the functionality of the platform. Hence = security.
The private blockchain + marketplace made consumers reliant on Dapper
A second part of the point above highlights that the consumer assets values were dependent on a private platform.
For the first year or so of NBA Top Shot, we could only buy/sell/trade the Moments on their marketplace (as opposed to NFTs on other chains, which can typically be traded on an open Marketplace).
So basically since we had no control on what we could do with our assets, and all of that was up to Dapper, then buying the Moments was an investment in that platform, not in a fun collectible asset.
Dapper led consumers to expect profit
This part was kind of shocking for me - the suit specifically calls out two tweets from NBA Top Shot that insinuate profit, hence making this a security.
These tweets were not uncommon in the community back in early 2021, but are notw being used against Dapper.
What Makes A Security
The Howey Test was developed to help identify securities. It has four components.
In today’s ruling, the Judge argued that Top Shot Moments constitute #2, #3, and #4, for the reason I summarized above.
What Happens Now
There’s no immediate next step in the lawsuit.
Although its possible this case will go to trial, which is likely what Dapper wants to avoid, there are likely many more legal steps they can take before getting there.
I don’t know who this is on Twitter, but looks to me like they know a few things about this type of stuff. I don’t think this is 100% accurate, but I agree that we are a long ways off from this going to trial for real.
It’s also likely that Dapper would want to settle prior to a trial, as a trial could expose a lot of their private documents/happenings and created more bad press (even if they think they could win). Again, that’s just my uneducated opinion here.
What This Means For The Community
Many people have reach out today and also written on Twitter.
A few things to clear up:
Top Shot is not dead. It will be business as usual for them.
The NBA is still invested in Dapper and supporting the project.
The FLOW token dumped on the news but has since recovered.
Very little has changed. So much so that many are dubbing this a big “nothing burger”, and saying its just another part of a typical lawsuit that we see often in big tech. I don’t necessarily disagree there! I think Dapper has a plan here for minimizing the lawsuit’s impact, and they have likely prepared for losing this part.
But that doesn’t mean it won’t have effects in our ecosystem.
Confidence in Top Shot will be shook. This will add to the negative narrative.
Institutional Investors will be spooked; it will be more difficult to raise funds for any Sports NFT project (Dapper is the leader, after all).
Brands coming to web3 are unlikely to launch a private Marketplace.
Private chains are less likely to get funded by VCs.
All NFT projects will continue to watch their language around words like “investment” and “profit”.
Personally I’m not entirely worried about the fate of Top Shot or Dapper here.
I believe Dapper has been setting itself up as a corporate entity for a few years now, and has a team well suited to deal with these types of issues. I also think that these types of suits are fairly common in crypto right now, especially post crash (there were a few similar ones in the DeFi space last year).
So as a company, this is nowhere near “the end”. If anything, coming out of this on the other side could reinforce the company’s status as a leader in the space, willing to take the hits and break barriers, even if its at the expense of short term consumer confidence.
On the product side, I hope it breeds positive change.
Sports NFTs are feeling stale, and many companies in the space were created in Top Shot’s image: which is proving to be a tough model to sell to the broader non-web3 consumer base. Ideally this pushes some innovation on the product side, and we see some new ideas come into the ecosystem to bring the experience to another level.
**This is not financial advice. Nothing in this newsletter, podcast, or publication should be considered financial or trading advice of any kind. Please do your own thorough research and make your own trading decisions. This is not advice.”
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