One of the byproducts of the initial coin offering craze was class action lawsuits that alleged that the underlying tokens were securities and that the securities law were violated because the offerings for those alleged securities did not comply with the securities laws.  The US Securities and Exchange Commission continues to pursue cases for the improper sale of unregistered tokens.  Not surprisingly, with the recent advent of the popularity of NFTs (non fungible tokens), a class action lawsuit has now been brought that alleges that the Dapper Labs violated the securities laws by selling NFTs as unregistered securities.

Dapper Labs is, of course, the company know originally for CryproKitties.  That ran on the Ethereum blockchain.  But Dapper developed its own blockchain, called Flow, to house NBA Top Shot, its co-venture with the NBA.  Top Shot is best known for selling “Moments,” which are often compared to sports trading cards.  Dapper clips NBA highlights and turns them into NFTs, which can be bought and sold.

The complaint alleges that that Moments are “securities” because, among other things, they  “constitute an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”  Readers of this blog will, of course, recognize that language as coming from the well know Howey test that has been used by the SEC for decades to determine whether something is a security. The complaint alleges that Dapper violated the securities laws because it did not register the alleged securities with the SEC.  The allegation is made despite the fact that the Top Shot users are required to agree that they “are using NFTs primarily as objects of play and not for investment or speculative purposes.”  The complaint also alleges that the company prevented customers from cashing out their NFTs in order to hold onto their money and propping up the market for Moments.

Interestingly, the lawsuit, by a resident of Virginia, was brought in state court in New York, even though the suit concerns the violation of federal securities laws.  The immediate reaction of securities laws experts was that the suit was of dubious merit as a securities lawsuit.


David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. David has been included in Chambers for his expertise in international arbitration. He is the editor of the firm's blockchain blog.