A Virginia woman named Jeeun Friel is suing the maker of NBA Top Shots, a type of NFT marketplace that lets consumers own unique basketball highlights. According to Friel, the NFTs in question are actually securities and their creator, Dapper Labs, harmed her and other buyers by failing to register them with the Securities and Exchange Commission.
In a lawsuit filed yesterday, Friel asks a New York state court to declare that Dappler Labs and its CEO, Roham Gharegozlou, violated securities law and to pay her and others who bought the NFTs an unspecified amount of damages.
For those unfamiliar with Top Shots, they have been around since late last year but really took off this February when Dapper Labs sold $2.6 million worth of the highlights in 30 minutes. Each one is nominally unique because it is registered as such on Dapper Labs’ blockchain blockchain , known as Flow. This tweet shows a sample Top Shot highlight:
Throwdowns (Series 2) Challenge 1 expires Monday, May 17 at 10am PDT ⏰
Collect all 9️⃣ required Moments ✅
Earn Blake Griffin Dunk Challenge Reward ??
Remember, this Moment will never be released in packs ?
— NBA Top Shot (@nbatopshot) May 11, 2021
According to Friel, the company prevented customers from cashing out their NFTs in order to hold onto their money and build up hype around Top Shots.
“NBA Top Shot does offer these digital assets, known as Moments, to United States investors and in fact has sold over $500 million worth of them … By preventing investors from ‘cashing out,’ Defendants ensured that money stayed on the platform, propping up the market for Moments as well as the overall valuation of NBA Top Shot,” states the complaint in support of the allegation that Dapper Labs violated securities laws.
While the issue of whether cryptocurrencies are securities has sparked numerous lawsuits over the years, the issue is not clear-cut, and this appears to be the first time someone has alleged that NFTs should also be considered securities.
The Top Shot lawsuit, however, appears to be far from a slam dunk. Stephen Palley, a veteran crypto lawyer, sneered on Twitter that the case was “goofy” and almost certain to be thrown out of court for technical reasons but also because it was “idiotic” to suggest that anything that might appreciate in value should be considered an “investment contract,” which is a type of security.
He pointed out that buying himself nice shoes would technically be an investment in his feet—but that this is a far cry from making them a security under the law.
I buy nice shoes because they are “an investment in my feet” and a good pair of Aldens, well cared for, will last for ten years. But my wing tips are not an investment contract.
— Palley (@stephendpalley) May 14, 2021
Palley did, however, acknowledge that Friel and others may have a legitimate grievance if their allegations are true about Dapper Labs delaying customers’ ability to sell their NFTs. But he added that, if so, any legal case would have to based on consumer protection laws rather than securities law.
In response to Decrypt‘s request for comment, a Dapper Labs spokesperson said: “Our practice is not to comment on legal matters.”