Class Action Lawsuit Against Dapper Labs Claims NBA Top Shot Violates Securities Act

On May 12, 2021, a Class Action Complaint was filed against Dapper Labs, Inc. and Roham Gharegozlou in the State of New York. The Complaint alleges that the defendants, who are behind the popular non-fungible token (NFT) platform NBA Top Shot, have violated The Securities Act of 1993 and wrongfully prevented users from withdrawing their money from the service provider. If you have participated on the NBA Top Shot platform, then you may have the ability to join the pending lawsuit, which still needs to be officially certified as a Class Action.

If you believe you may have a claim, then feel free to contact us about your particular issue. We keep all communications confidential, pride ourselves on quick and active responses, and do not charge for initial consultations.

The important position taken by the lead plaintiff in the pending lawsuit against Dapper Labs and Roham Gharegozlou is that NBA Top Shot has been promoting, offering, and selling securities in the form of NBA Top Shot Moments, which are NFTs attached to professional basketball player performances, in the form of highlights. The lawsuit intends to distinguish the NBA Top Shot platform from more traditional forms of cryptocurrencies such as Bitcoin and Ethereium. It classifies the latter as commodities that are decentralized means of exchange, which are only subject to market forces, whereas Dapper Labs and Roham Gharegozlou have exerted control over NBA Top Shot, making each moment traded on the platform defined as a security.

However, Dapper Labs and Roham Gharegozlou have not sought to register any of the NBA Top Shot NFTs as securities with the Securities and Exchange Commission. The pending Class Action Complaint argues that Dapper Labs and Roham Gharegozlou have reaped hundreds of millions of dollars in profits in the meantime. “Moreover, Defendants used their control over NBA Top Shot to prevent investors from withdrawing their funds for months on end,” states the initial filing. “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.”

Did Dapper Labs and Roham Gharegozlou deny information to retail investors who lacked the technical and financial sophistication necessary to have evaluated the risks associated with their investments in NBA Top Shot moments? If so, it could lead to the establishment of significant damages under The Securities Act of 1933.

There is complexity in the Class Action Complaint, which is understandable due to the nature of the cryptocurrency offerings of Dapper Labs and Roham Gharegozlou. It is explained that Dapper Labs created a Flow token, used as a native currency on the Flow blockchain, and that the distribution of Flow tokens qualifies as a securities offering under securities laws. Yet, Dapper Labs has not registered the Flow token as a security and thus a claim has been made that it is selling the token to United States investors as an unregistered securities offering. Further, the Class Action Complaint specifically alleges that 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 conducts what is called a Howey test under the important Supreme Court case of SEC v. W.J. Howey Co. from 1946 and it references an April 2019 document from the SEC titled, “Framework for ‘Investment Contract’ Analysis of Digital Assets.” The conclusion that is drawn is that NBA Top Shot moments are securities under the Framework and under the Howey test. Perhaps the most important question is whether investors in NBA Top Shot moments expect profits to be derived from the managerial efforts of the issuers. There are two factors to consider: (1) Does the purchaser reasonably expect to rely on the efforts of an active participant; and (2) Are those efforts the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise, as opposed to efforts that are more ministerial in nature? The Class Action Complaint says the factors weigh against Dapper Labs and Roham Gharegozlou since the success of NBA Top Shot’s ability to maintain the moment craze is essentially what controls the investment.

Finally, the lawsuit highlights a major failure of Dapper Labs with regard to its unwillingness to allow users to quickly withdraw their money from the NBA Top Shot platform. An unspecified amount of money is being sought by a class of plaintiffs yet to be certified. They are also seeking reimbursement of their attorney’s fees and costs.