Nixon Peabody LLP

  • People
  • Capabilities
  • Insights
  • About

Trending Topics

    • People
    • Capabilities
    • Insights
    • About
    • Locations
    • Events
    • Careers
    • Alumni

    Practices

    View All

    • Affordable Housing
    • Community Development Finance
    • Corporate & Finance
    • Cybersecurity & Privacy
    • Environmental
    • Franchising & Distribution
    • Government Investigations & White Collar Defense
    • Healthcare
    • Intellectual Property
    • International Services
    • Labor & Employment
    • Litigation
    • Private Wealth & Advisory
    • Project Finance
    • Public Finance
    • Real Estate
    • Regulatory & Government Relations

    Industries

    View All

    • Cannabis
    • Consumer
    • Energy
    • Entertainment
    • Financial Services
    • Healthcare
    • Higher Education
    • Infrastructure
    • Manufacturing
    • Non Profit
    • Real Estate
    • Technology

    Value-Added Services

    View All

    • Alternative Fee Arrangements

      Developing innovative pricing structures and alternative fee agreement models that deliver additional value for our clients.

    • Continuing Education

      Advancing professional knowledge and offering credits for attorneys, staff and other professionals.

    • Crisis Advisory

      Helping clients respond correctly when a crisis occurs.

    • DEI Strategic Services

      Providing our clients with legal, strategic, and practical advice to make transformational changes in their organizations.

    • eDiscovery

      Leveraging law and technology to deliver sound solutions.

    • Global Services

      Delivering seamless service through partnerships across the globe.

    • Innovation

      Leveraging leading-edge technology to guide change and create seamless, collaborative experiences for clients and attorneys.

    • IPED

      Industry-leading conferences focused on affordable housing, tax credits, and more.

    • Legal Project Management

      Providing actionable information to support strategic decision-making.

    • Legally Green

      Teaming with clients to advance sustainable projects, mitigate the effects of climate change, and protect our planet.

    • Nixon Peabody Trust Company

      Offering a range of investment management and fiduciary services.

    • NP Capital Connector

      Bringing together companies and investors for tomorrow’s new deals.

    • NP Second Opinion

      Offering fresh insights on cases that are delayed, over budget, or off-target from the desired resolution.

    • NP Trial

      Courtroom-ready lawyers who can resolve disputes early on clients’ terms or prevail at trial before a judge or jury.

    • Social Impact

      Creating positive impact in our communities through increasing equity, access, and opportunity.

    1. Home
    2. Insights
    3. Alerts
    4. Court rules NBA-branded Top Shot Moments NFTs may be investment contractsAlerts

    Alert / Intellectual Property

    Court rules NBA-branded Top Shot Moments NFTs may be investment contracts

    Feb 28, 2023

    Share

    By Joshua Pollack and Erica Van Loon

    Intellectual Property law and NFTs — Can Non-Fungible Tokens be subject to federal securities laws?

    What’s the impact?

    • The Southern District of New York denied a motion to dismiss by blockchain company Dapper Labs, and held that plaintiffs adequately alleged that NBA Top Shot Moments NFTs are “investment contracts.”
    • Fundamental to the court’s conclusion was that Dapper Labs created and maintains a private blockchain.
    • The court’s decision provides guidance on how to structure an NFT project to minimize securities risks.

    Summary of the Dapper Labs case

    Dapper Labs developed a blockchain technology called “Flow,” which supports the sale of non-fungible tokens (NFTs). Dapper Labs then partnered with the NBA to launch an NFT platform called “NBA Top Shot,” which sells NFTs called NBA Top Shot Moments (or “NBA Moments”) on Dapper’s Flow blockchain.

    In 2021, plaintiffs filed a putative class action complaint against Dapper Labs, alleging that the NFTs sold by Dapper Labs on its platform constitute unregistered securities in violation of federal securities laws. Specifically, plaintiffs claim that the NBA Moments are “investment contracts” that must comply with federal securities requirements.

    Under the “Howey” test developed by the U.S. Supreme Court, “an investment contract for purposes of the Securities Act means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Plaintiffs allege that Dapper Labs “used their control over NBA Top Shot” to prevent investors from “cashing out,” which “ensured that money stayed on the platform” and “propp[ed] up the market for Moments as well as the overall valuation of NBA Top Shot.” Plaintiffs also alleged that Dapper Labs created scarcity by selling Moments in limited edition packs and requiring all subsequent sales to take place on the NBA Top Shot platform. On August 31, 2022, Dapper Labs filed a motion to dismiss, arguing that plaintiffs can’t “make a federal securities case over basketball cards” and “Basketball cards are not securities. Pokémon cards are not securities. Baseball cards are not securities. Common sense says so. The law says so. And courts say so.” Plaintiffs opposed the motion to dismiss.

    On February 23, 2023, the Southern District of New York issued an order denying Dapper Labs’ motion to dismiss. The court ruled that “what Dapper Labs offered was an investment contract under Howey,” primarily because “Dapper Labs created and maintained a private blockchain.” According to the court, the privatization of the Flow blockchain and the restriction of the trade of NBA Moments to only the Flow blockchain “are what distinguish [NBA] Moments from cardboard basketball cards.”

    Takeaways

    By the court’s own admission, its decision is a “narrow” one; “not all NFTs offered or sold by any company will constitute a security,” and “each scheme must be assessed on a case-by-case basis.” What was determinative for the court in this case is that Dapper Labs maintains private control over the Flow blockchain, which “significantly, if not entirely dictates NBA Moments’ value”; that Dapper Labs touts NBA Moments as a means for purchasers to realize substantial profits; and that “without Dapper Labs’s essential efforts in maintaining the Flow Blockchain and Marketplace, [NBA] Moments would be valueless.”

    Although many sellers of NFTs do not maintain private control over the blockchain on which the NFTs are marketed and traded, those that do should consider taking steps to ensure that they are complying with federal securities laws. For entities considering whether to offer NFTs on a public blockchain or on a privately controlled blockchain, the Dapper Labs decision offers excellent guidance on how to best structure an NFT project to minimize securities risks.

    Practices

    Intellectual PropertyFinancial Institutions & Banking DisputesCybersecurity & Privacy

    Industries

    Financial Services

    Insights And Happenings

    • Alert

      New York City Biometric Law - Are you in compliance?

      March 23, 2023
    • Alert

      U.S. Copyright Office limits registration for AI-created Zarya of the Dawn graphic novel

      March 9, 2023
    • Press Release

      Nixon Peabody advises Aser Ventures and Eleven Sports Network in sale of leading sports media business

      March 2, 2023

    Subscribe to stay informed of the latest legal news, alerts, and business trends.Subscribe

    • People
    • Capabilities
    • Insights
    • About
    • Locations
    • Events
    • Careers
    • Alumni
    • © 2023 Nixon Peabody. All rights reserved
    • Privacy Policy
    • Terms of Use
    • Statement of Client Rights
    • Supplier Diversity Program
    • Nixon Peabody International LLC
    • PAL