- At the same time, a court decision in favor of the regulator can create a dangerous precedent.
- This will give the Commission the power to regulate the NFT market.
Lawyers believe that the position of Dapper Labs in a dispute with federal authorities in the NBA Top Shots case is very weak. At the same time, the outcome of the trial, positive for the SEC, will create an extremely dangerous precedent for the entire industry as a whole.
What is it about?
Recall that at the end of February, the court approved a class action lawsuit from holders of NBA Top Shots tokens. It states that the collection refers to securities. At the same time, Dapper Labs allegedly did not have the right to distribute it without a license.
The company filed a motion to dismiss the lawsuit, but lost. Judge Victor Marrero noted that the collection falls under the definition of a derivative in accordance with the Howey Test, which we analyzed in a separate article.
Dapper Labs, in turn, declared their readiness to defend the case in court. If the lawsuit is granted, the company will fall under the sanctions of the Securities and Exchange Commission (SEC), and this is fraught with a hefty fine.
Legal assessment of the case
Blockworks Portal asked several lawyers to comment on the situation. They all agreed that the position of Dapper Labs is frankly weak.
The company’s NFT collection meets three of the four basic security features according to the Howey Test. Therefore, the plaintiff has a much better chance in court.
First, funds were invested in the project. Even the defendant agrees with this. Secondly, sales of the collection supported the Flow blockchain, which corresponds to the concept of an “enterprise”. Third, distribution of the collection is motivated by the expectation of profit.
The question remains only the sole control of Dapper Labs over the market where NFTs are traded. If this is proven in court, then the collection will be recognized as a derivative, and issuers of tokens in the United States will face the risk of pressure from the SEC.
The Top Shots royalty structure itself is in line with the “fund pooling” feature. Dapper Labs at the same time receives a percentage of each sale, therefore, uses the vertical community, which is typical for issuers in the stock market.
The lawyers of Winston and Strawn even state that there is a precedent for defining a derivative based on this feature. And if the accuser uses it, Dapper Labs’ chances of a positive outcome will be minimal.