NFT

Is it a Security Under US Law?

According to a court ruling earlier this week, federal judge Victor Marreo has deemed that Dapper Labs’ NBA Top Shot NFTs could be classed as securities.

Quick Take

  • As part of a court ruling, it was declared that NBA Top Shot NFTs could be classed as securities, according to the United States security laws.
  • NBA Top Shot has been one of Dapper Labs’ biggest projects – raking in well over $1 billion worth of secondary market sales on their platform.
  • NBA Top Shot is a blockchain-based platform that allows users to buy, sell, and trade unique digital assets, called moments, which are tied to specific NBA game highlights.

NBA Top Shot has long been the top-performing basketball NFT collection

The NBA Top Shot Court Ruling

Initially, a class action lawsuit was filed in May 2021 by Plaintiff Jeeun Friel who claimed that NBA Top Shot NFTs were unregistered securities. As well as this, other things regarding the processing time of withdrawing funds.

According to the plaintiff, the platform were leading investors to “expect profit”. He claimed they have been doing this through cool and flashy advertising and scarcity of moments.

Under the Howey Test, federal judge Victor Marreo ruled that Dapper’s NBA Top Shot NFTs were in fact securities. To clarify, the Howey a legal standard used to determine if a transaction should be considered an investment contract

After the call, Marreo said. “Ultimately, the Court’s conclusion that what Dapper Labs offered was an investment contract under Howey is narrow. Not all NFTs offered or sold by any company will constitute security. Each scheme must be assessed on a case-by-case basis.”

He continued: “Rather, it is the particular scheme by which Dapper Labs offers Moments that creates the sufficient legal relationship between investors and promoter to establish an investment contract. This is a security, under Howey.”

What is a Security?

A security is a financial instrument that represents ownership or a creditor relationship with a corporation, government, or other organization. Securities can include stocks, bonds, and options, among others. They are bought and sold on financial markets, where the price fluctuates based on supply and demand.

The main issue with securities are that they’re put under certain strict rules and proceedings they must follow. So, if a project is classed as an unregistered security, they’re avoiding them.

When it comes to NFTs, there is debate around whether they can be considered securities. If an NFT is marketed or sold as an investment, or if the owner expects to profit from it, it may be classified as a security. Therefore, it would then subject to regulatory requirements. Particularly, this has been the case in this Dapper Labs situation.

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