NBA Top Shots Moments Violate Securities Laws, Class Action Lawsuit Alleges

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The sellers of NBA Top Shot Moments are being accused of running afoul of federal securities laws in a recent class action lawsuit.

The lawsuit was filed by plaintiff Jeuun Friel May 12 in state court in New York against Dapper Labs Inc., as well as the company’s founder and CEO, Roham Gharegozlou. The NBA Top Shot Moments sold by Dapper Labs are short videos that depict highlights of NBA games. They are a type of digital asset known as non-fungible tokens (NFTs) — a form of selling original digital media or art that is unique and cannot be replaced with something else. The NFTs exist on the Flow blockchain, created by Dapper Labs, which is an online, decentralized ledger that records transactions of the NFTs.

According to the lawsuit, in order to make the blockchain function, Dapper Labs had to create the Flow token, which the lawsuit argues “qualifies as a securities offering under the securities laws.”

Dapper Labs, the lawsuit acknowledges, says on its website that it is committed to “full compliance with securities laws,” and the lawsuit notes that because the Flow tokens are not registered as securities in the United States, Dapper Labs only allows public sales and auctions of them to non-U.S. individuals.

The crux of the lawsuit is that, Friel alleges, the NBA Top Shots themselves constitute unregistered securities.

The Top Shot Moments first went on sale to the public at large on Oct. 1, 2020, when they were launched in an “open beta.”

Top Shots are created when the NBA, the National Basketball Players’ Association and Dapper Labs all agree that a particular NBA game highlight should become a Top Shot Moment. At that point, Dapper Labs “mints” the highlight into an NFT, creating a unique digital asset recorded on Dapper’s blockchain.

“One can think of the minting process as imprinting the NFT with its own serial number or barcode,” the lawsuit says. “The minting process also creates the beginning of the record associated with the NFT. Ownership, transfers, and prices will be recorded permanently on the blockchain. While editions of Moments are minted from the same basketball chain, NFTs are, by nature, unique.”

The NBA Top Shot Moments are sold in “packs,” which have three tiers: common, which includes nine common Moments that have a production of over 1,000 with no maximum; rare, which includes seven common moments and one rare moment with a maximum production of 999; and legendary, which includes six common moments, one rare and one legendary moment with a maximum production of 99.

Friel argues that Dapper Labs also creates scarcity by selling the packs in limited drops “that can and do often sell out.”

“The prospect of acquiring a Moment in a pack from NBA Top Shot and then re-selling the Moment for a huge profit in the Marketplace, or buying a Moment in the Marketplace and then turning around and selling it for more, has provided the impetus in the current surge in demand for Moments,” the lawsuit argues.

The lawsuit argues that because of this dynamic, the Top Shot Moments actually are securities and should have been registered as such with the Securities and Exchange Commission.

“NBA Top Shot Moments are securities because they constitute an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” the lawsuit argues.

The plaintiff is seeking damages “in an amount to be determined at trial,” a court order declaring the defendants’ actions to be in violation of federal law, attorney’s fees, pre- and post-judgement interest and “any and all other such relief as the Court may deem just and proper under the circumstances.”

While Friel is a resident of Virginia and Dapper Labs is based in Vancouver, Canada, the lawsuit was filed in New York County (Manhattan) because the defendants “conducted business in this County, have employees based in this County, and in launching NBA Top Shot have partnered with the NBA, which is based in this County,” according to the lawsuit.

The plaintiff is represented by Philip Kim, Laurence M. Rosen and Michael Cohen of the Rosen Law Group.

The NBA Top Shot Moments Class Action Lawsuit is Friel v. Dapper Labs Inc. and Roham Gharegozlou, in the Supreme Court of the State of New York, County of New York.

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