Judge Rules that because FLOW is a private blockchain provided by Dapper Labs, Case can move forward.
The court’s decision was based on the fact that Dapper Labs maintained a private blockchain and limited the trade of Moments to only the Flow blockchain, which meant that purchasers had to rely on Dapper Labs’s managerial efforts to create and maintain value for Moments.
The ruling discusses a recent court case that examined whether NBA Top Shot’s “Moments” are a type of investment contract, which would make them a type of security subject to certain regulations. The court found that Top Shot’s Moments did qualify as an investment contract and therefore were securities. This was because the value of Moments depended on the managerial efforts of Dapper Labs, the company that created and managed NBA Top Shot. The court’s decision was based on the fact that Dapper Labs maintained a private blockchain and limited the trade of Moments to only the Flow blockchain, which meant that purchasers had to rely on Dapper Labs’s managerial efforts to create and maintain value for Moments.
The case involves a lawsuit brought by a group of investors who purchased non-fungible tokens (NFTs) known as “NBA Top Shot Moments” from Dapper Labs, a blockchain company that created and manages the Flow blockchain. The investors alleged that the NFTs constitute securities under US federal law and that Dapper Labs violated securities laws by failing to register them with the Securities and Exchange Commission (SEC).
In the ruling, the court held that the investors had plausibly alleged that the NFTs constituted investment contracts and thus securities under the Howey test, a legal framework used to determine whether an investment contract exists. The court found that Dapper Labs had created a scheme in which investors were promised profits through the low sale prices for NFT packs and the marketing of substantial profits made by others through the sale of NFTs on Dapper Labs’s proprietary Marketplace. The court also found that the investors relied on Dapper Labs’s managerial efforts in cultivating the Marketplace and maintaining the Flow blockchain, as without those efforts, the NFTs would not exist.
The court rejected Dapper Labs’s argument that the NFTs were not securities because purchasers had control over their portfolios and could select which NFTs to buy and when to trade them. The court found that Dapper Labs’s control over the private blockchain on which the NFTs’ value depends, as well as its restrictions on where the NFTs can be sold and how they can be used, distinguished the NFTs from physical basketball cards that can be freely alienated to whomever and over whatever platform the owner prefers.
The court’s ruling is significant because it is one of the first judicial decisions to address the question of whether NFTs constitute securities under US federal law. The ruling highlights the need for companies offering NFTs to carefully consider whether their offerings may be subject to securities laws and to take appropriate steps to comply with those laws.
Flow may have been the crux that moves the case forward.
Private blockchains are becoming more popular for businesses and organizations looking to streamline their operations and maintain control over their data. However, there are potential securities risks associated with using private blockchains for fundraising and issuing tokens. The tokens issued on private blockchains may be considered securities, and if they are not registered with regulatory authorities, it could result in legal consequences for the projects issuing them. It’s important to keep in mind that we are not legal experts and cannot provide legal advice. If you have any questions or concerns about the legal implications of using private blockchains for your project, it’s important to consult with an attorney who specializes in securities law.
It will be interesting to see what happens to other NFT projects moving to FLOW.
We will provide more information as it becomes available.