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SDNY Allows Lawsuit Alleging NBA Top Shot NFTs Are Securities to Proceed
Practical Law Legal Update w-038-7928 (Approx. 6 pages)
SDNY Allows Lawsuit Alleging NBA Top Shot NFTs Are Securities to Proceed
by Practical Law Finance
| Published on 10 Mar 2023 • USA (National/Federal) |
In Friel v. Dapper Labs, Inc., a judge in the US District Court for the Southern District of New York (SDNY) held that plaintiffs' allegations that NBA Top Shot Moments non-fungible tokens (NFTs) were investment contracts that constituted securities under the Howey test are facially plausible and denied defendants' motion to dismiss.
On February 22, 2023, a judge in the US District Court for the Southern District of New York (SDNY), in denying defendants' motion to dismiss plaintiffs' amended complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure, held that plaintiffs adequately pled that NBA Top Shot Moments non-fungible tokens (NFTs) were investment contracts that constituted securities under the Howey test (Friel v. Dapper Labs, Inc., (S.D.N.Y. 2023)).
Plaintiffs, whose class of individuals purchased NBA Top Shot Moments (Moments NFTs) between June 15, 2020 and the date of the decision, allege that defendants Dapper Labs, Inc. and Dapper Labs' Chief Executive Officer, Roham Gharegozlou (collectively, defendants) violated federal securities laws by offering Moments NFTs for sale to the public without filing a registration statement with the SEC.
The SDNY held that plaintiffs sufficiently alleged the Moments NFTs were an investment contract that constituted a security under the Howey test because:
- Plaintiffs' money spent to purchase Moments NFTs constituted an investment of money, which neither party contested.
- Plaintiffs adequately alleged a common enterprise. Specifically, the SDNY found the plaintiffs adequately pled a pooling of investor funds and that the fortunes of the investors were tied to the overall venture, satisfying the horizontal commonality test under Howey.
- Plaintiffs adequately pled that the offer of Moments NFTs included expectations of profit from the essential entrepreneurial or managerial efforts of others because the complaint plausibly alleged that:
- profits were promised by defendants in connection with the offer of Moments NFTs and purchasers primarily bought them for investment purposes; and
- defendants' use of a private blockchain make Moments NFT purchasers practically dependent on defendants' expertise and managerial efforts.
Although it determined plaintiffs adequately pled that Moments NFTs were securities under Howey, the court declared that its conclusion is narrow and that:
- Not all NFTs offered or sold by any company will constitute a security.
- Each "scheme" must be assessed on a case-by-case basis.
The Howey test was established in S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298 (U.S. 1946). For more information on the application of the Howey test to digital assets, see Practice Note, SEC Regulation of Digital Assets: The Howey Test: FinHub Framework Provides Additional Considerations for Digital Assets.
The court directed defendants to answer within 21 days of the decision.