dapper labs, the company behind many popular collectible NFT projects, will face a lawsuit accusing it of selling unregistered securities. In particular, the company has developed the popular game NFT NBA top shot and one of the original NFT collectible games, CryptoKitties.
A class action lawsuit was first filed against Dapper Labs in 2021. The company filed a motion to dismiss the lawsuit before trial. And yet, as coindesk seenFederal District Judge Víctor Marrero denied the request, meaning the case will go ahead.
If you’re not familiar with NBA Top Shot, users can go to the website to purchase digital cards representing NBA “Moments,” which are short video clips of memorable moments. They can then buy and sell some of their cards to other players. The value of these digital collectibles can go up and down over time.
Each digital card is registered as a unique token on a blockchain. While other NFT based games like Sister relying on the Ethereum blockchain, Dapper Labs has decided to develop its own private blockchain called Flow. The company said that this new blockchain is optimized for scalability and practical use cases.
“Flow Blockchain uses ‘Proof of Stake’ validation to enable the business to scale more efficiently. Dapper Labs also created a token, FLOW, that miners could stake to validate transactions,” Marrero wrote in his decision.
And this is key to understanding the current demand. In his conclusion, Marrero distinguishes NBA Top Shot Moments from other types of NFTs.
“Not all NFTs offered or sold by any company will constitute a security, and each scheme must be evaluated on a case-by-case basis,” he wrote. (And Moments shouldn’t be considered securities either, as the lawsuit hasn’t gone through yet.)
So what sets Moments apart from other NFTs? And what makes Moments different from physical sports cards? The fact that Moments can only be traded on the Flow blockchain means that Dapper Labs has some control over the value of those Moments.
“The NBA Top Shot Terms of Use also state that Moments have no intrinsic or inherent value outside of the Flow Blockchain. […] It follows that if, hypothetically, Dapper Labs were to go out of business and shut down the Flow Blockchain, the value of all moments would drop to zero. That is the critical causal connection that other collectibles cases lack, and that is alleged here,” Marrero wrote.
Even if NBA Top Shot users try to sell their Moments, they must go through the official secondary market. “Ownership of Moments, the price paid for Moments, and the transfer and sale of Moments on the Market are recorded only on the Flow Blockchain. Dapper Labs does not acknowledge or endorse Moments being sold or traded outside of the Market,” Marrero wrote.
In September 2021, Dapper Labs raised a $250 million funding round with Coatue leading the investment. At the time, the company achieved an impressive valuation of $7.6 billion. While NFT sales have declined dramatically in recent months, the company has managed to attract more than a million users and generate hundreds of millions of dollars in transaction volume. The company takes a share of newly minted NFTs, market transactions, and cash-out transactions.
Even if not all NFTs are created equal, the case will have wide-ranging repercussions throughout the industry, especially for companies using private blockchains.
