The first quarter of 2023 hasn’t started much better for the blockchain and cryptocurrency industry than the fourth quarter of 2022 ended. Last week, in Friel v. Dapper Labs, Inc et al., a federal judge declined to dismiss a class action complaint alleging securities law violations, finding that the Plaintiffs plausibly alleged that the non-fungible tokens (NFTs) sold on the NBA’s Top Shot platform could be securities. The ruling was the first of its kind, and while the court expressly stated that it is narrow in scope and other NFTs may not be securities, the holding could ultimately have far-reaching implications for other NFT projects and marketplaces as applied, particularly in today’s uncertain environment.
NBA Top Shot is an NFT platform, owned and operated by Dapper Labs, that allows consumers to buy, sell, and trade “Moments” NFTs (digital video clips of player highlights) on Dapper Lab’s Flow Blockchain. On February 22, 2023, the United States District Court for the Southern District of New York denied Dapper Labs’ motion to dismiss, holding that although “it is a close call and the Court’s decision is narrow,” Moments NFTs qualify as securities under the Howey test, the four-pronged test created by the Supreme Court in SEC v. Howey Co. to determine whether certain transactions qualify as investment transactions and are thus regulated securities. In its decision to deny the motion to dismiss, the court focused on prongs two and three of the Howey test.
The FTC