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NBA Top Shots are Not Securities, $4m Settlement Rules
Dapper Labs, creators of NBA Top Shots, have reached a settlement with plaintiffs that alledged Top Shots were securities.
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NBA Top Shots are Not Securities, $4m Settlement Rules
The Sporting Crypto Newsletter is supported by The HBAR Foundation.
Dapper Labs, the creators of NBA Top Shots, have settled a multi-year lawsuit to the tune of $4 million.
In February 2023, Sporting Crypto discussed whether or not NBA Top Shots are securities under SEC guidance ā after a judge rejected a motion to dismiss a lawsuit filed in 2021 alleging that they were.
Fast forward almost 18 months, and the suit has been settled with the plaintiffs compensated for a reported $4 million, with some caveats attached, which weāll dive into in this edition.
Discussed in this edition of Sporting Crypto:
The LawsuitšØāāļøa) The allegationsb) The defence
The Settlementāļøa) Dapper Labsā obligations
Analysis & Concluding Thoughts š§ a) Will we see more regulatory clarity?
The LawsuitšØāāļø
Letās dig into the previous lawsuit to bring everyone up to speed.
In 2021, a lawsuit was filed against Dapper Labs and their CEO Roham Gharegozlu alleging that NBA Top Shots are securities.
18 months later, a motion to dismiss that Dapper Labs had filed was denied by a Judge for a variety of reasons.
One resounding piece of the dismissal read:
āit is plausible that Momentsā* value is derived almost entirely from the continued operation by Dapper Labs of the Flow Blockchain, which enables price transparency (and thus influences value) but, perhaps more critically, appears to provide purchasers with the ability to trade at all. Defendantsā failure to acknowledge the blockchain technology that underlies Moments is fatal to their Motion in this respectā
*A reminder that āmomentsā are the NFTs in the NBA Top Shot product
The plaintiffs and the judge also pointed to how NBA Top Shots were marketed by Dapper Labs, and the court found āthat Defendantsā public statements and marketing materials objectively led purchasers to expect profits,ā
In addition to this, the plaintiffs took issue with the Flow blockchain itself, where the NBA Top Shots NFTs are created.
They alleged that āwithout FLOW tokens, no transactions on the Flow Blockchain can be validated. Indeed, the āProof-of-Stakeā mechanism employed by the Flow Blockchain requires FLOW to power it and incentivise miners to validate transactions. In that respect, FLOWās utility creates value for Moments through the networkās consensus as to ownership and the price of each transaction,ā
Blockchains are typically more secure the more distributed they are from a validation perspective. In plain English - the more people validating transactions on a blockchain - the more decentralised, and for the most part, secure it is. But the validation of these transactions was not the sole thing the plaintiffs pointed to, it was the fact that many, or most, of these transactions were due to the NBA Top Shot product.
Ergo, they argued that without Top Shot, FLOW wouldnāt have enough transactions on the network to definitively prove they are decentralisedā¦ because there is a central point of failure to that decentralisationā¦ and fewer transactions on the network could require fewer validators, making itā¦ more centralised.
The Judge went through every prong of the Howey Test (the test which determines if something is a security or not) and deemed it āplausibleā meaning the motion to dismiss was ultimately denied. Dapper, the defendants, argued that āBasketball cards are not securities. Pokemon cards are not securities. Baseball cards are not securities. Common sense says so. The law says so. And courts say soā
The Settlementāļø
On X (formerly Twitter) ā Roham Gharegozlu announced that there had been a legal resolution and that after discovery it was understood and agreed that:
Flow the blockchain is a decentralised public network
Digital collectibles like NBA Top Shots are not securities
Roham went on to write:
These were the main allegations we wanted to prove, and continuing to litigate would have been a distraction from our core mission. The settlement also involves Dapper Labs reaffirming its commitment to the decentralization of Flow, as well as confirming the full transfer of all $FLOW coins as part of the ecosystem development reserve to the Flow Foundation. Dapper Labs can, does, and will continue to be a major holder of $FLOW and a major builder in the Flow ecosystem. The future of our products is fully open and composable, letting owners do anything they want with their assets and letting developers build new and innovative experiences without traditional limits.
The business changes that Dapper Labs will implement include:
Transferring $FLOW tokens to the independent Flow Foundation, to ensure further decentralisation.
Third-party marketplaces are enabled to sell NBA Top Shot NFTs, to ensure that there is less centralised risk around the trading of these NFTs.
Pledged to enact a mandatory annual staff training program that covers federal securities laws.
Pending court approval, the settlement will compensate claimants and cover legal fees and provide Dapper Labs with a clearer legal framework to continue its operations.
š§ Analysis & Concluding Thoughts
Itās widely known that crypto needs more modern and clear rules and regulations.
Dapper Labs thinks this is a small step in that right direction.
In his post on X (formerly Twitter) ā Gharegozlu, went on to say:
āBeyond our win today, the future of our industry and open digital systems relies on effective communication with policymakers and regulators. Dapper Labs will continue to engage at all levels to help ensure sensible approaches to this new technologyāāwhich ultimately is much better for both consumers and creators because of its openness, transparency, and auditability.ā
This feels like a good thing for Web3 in general and especially the Web3 Sports ecosystem that Dapper Labs and Flow are such a big part of.
Another byproduct of this case is ensuring that Flow the blockchain is more decentralised, which is a good thing.
Regulation is often a huge blocker for rights holders and brands, and this is a good example of why.
It is still one of the most discussed things when I have conversations with big brands.
Lawyers are petrified of making mistakes or letting their strategy & innovation teams fly too far without a steer.
There are no rulebooks and very little precedent which means a lot of the innovation in this space, be it sports or other industries by big brands, is pretty groundbreaking.
There are signs that weāre on the right track, however.
Watford FC who recently announced a digital share scheme to their fans ā which may come with tokens in the future ā is one example that shows signs that playbooks are being created that could have some fairly big implications for the future of how brands interact with Web3 technology.
PayPal now has their own stablecoin.
A Bitcoin ETF is in the market and an Ethereum ETF is on the way.
All of these headlines, whether in Sports, entertainment or finance, about huge and complex entities in a regulatorily compliant way is a huge win for this industry.
If it is to be mainstream and ubiquitous, it must cease to be the crazy Wild West that many still view it as. As crude as settlements and court cases may be, they are necessary to at the very least provide some basis point, some precedent, on which regulatory clarity can be built.
It feels like weāre in a ādiscoveryā phase for regulation.
This was kickstarted by the FTX implosion a couple of years back, but with each project or proposition that is launched, we are narrowing in on what is and what isnāt allowed.
The sooner this is clearer, we will see more brands experiment in this space. Thatās for certain.
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