Federal Judge Denies Dapper Labs’ Motion for Dismissal

  • Dapper Labs has 21 days to respond to the ruling.
  • There has been a growing conversation about what digital assets qualify as securities.

A federal judge ruled on Wednesday that Dapper Lab’s “NBA Top Shot Moments” qualify as securities as they meet the criteria under the United States security law. Judge Victor Marrero denied Dapper Labs CEO Roham Gharegozlou’s request to dismiss a class action lawsuit claiming that the company’s NBA Top Shot NFTs are securities.

The suit, which was filed a year and a half ago, claims Gharegozlu and Dapper Labs offered their NFT collection without first registering with the US Securities and Exchange Commission (SEC), thereby violating federal securities law.

By denying Dapper Labs’ dismissal motion, Judge Marrero authorized the case to proceed. According to the court documents, the judge reviewed the Howey Test to assess if the NFTs met the criteria for an investment contract covered by U.S. securities laws before reaching a decision.

“The Court finds that Plaintiffs’ allegations render each consideration under Howey facially plausible and survive Defendants’ Motion to Dismiss the alleged violation of Sections 5 and 12 of the Securities Act,” the ruling read.

Judge Marreo ruled that Dapper Labs’ FLOW tokens, though not necessarily securities themselves, are “necessary to the totality of the scheme at issue.” The federal judge noted that “without FLOW tokens, no transactions on the Flow Blockchain can be validated.”

The ruling added that the “Proof-of-Stake’ mechanism employed by the Flow Blockchain requires FLOW to power it and incentivize miners to validate transactions. In that respect, FLOW’s utility creates value for Moments through the network’s consensus as to ownership and the price of each transaction.”

Judge Marreo, however, noted that “not all NFTs offered or sold by any company will constitute a security, and each scheme must be assessed on a case-by-case basis.” 

Explaining Dapper Labs’ peculiarity, the ruling said,

It is the particular scheme by which Dapper Labs offers Moments that create the sufficient legal relationship between investors and promoter to establish an investment contract, and this a security, under Howey.

Reacting to the ruling, a Dapper Labs spokesperson noted that Wednesday’s decision “only denied the defendant’s motion to dismiss the complaint.” The spokesperson claimed the ruling “did not conclude the plaintiffs were right, and it is not a final ruling on the merits of the case.”

Judge Marreo’s ruling is part of a larger discussion concerning whether different digital assets should be classified as securities. Earlier this month, the SEC announced that it had reached a $30 million settlement with cryptocurrency exchange Kraken over its staking services. The US government is also looking into traditional Wall Street investment advisers that provide client custody of digital assets without being properly licensed.

Dapper Labs has 21 days to respond to the ruling.

Lawrence Woriji
Lawrence Woriji Verified Author

I have covered some exciting stories in my career as a journalist and find blockchain-related stories very intriguing. I believe Web3 will change the world and want everyone to be a part of it.

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