The start of 2023 hasn’t gone much better for the blockchain and cryptocurrency industry than the end of 2022 did. In declining to dismiss a case alleging that non-fungible tokens (NFTs) called Moments are considered securities, a federal judge held in Friel v. Dapper Labs that a lawsuit against the creator of the NBA Top Shot platform can proceed. By surviving the motion to dismiss, the Plaintiffs plausibly alleged that these NBA Top Shot NFTs, and only these NFTs, could be a security. While the first of its kind to hold that an NFT could be considered a security, this seemingly narrow ruling could have far-reaching implications for other NFT projects and marketplaces.
NBA Top Shot is an NFT platform, owned and operated by Dapper Labs, that allows consumers to buy, sell, and trade Moments (digital video clips of player highlights) on Dapper Lab’s Flow Blockchain. On February 22, 2023, the United States District Court for the Southern District of New York denied Dapper Labs’ motion to dismiss, holding that although “it [is] a close call and the Court’s decision is narrow,” Moments qualify as a security under the Howey test. In its decision to deny the motion to dismiss, the court focused on prongs two and three of the Howey test.