A recent court decision on a class-action lawsuit against Dapper Labs may provide much-needed regulatory clarity for non-fungible tokens (NFTs) and their entry into Web3. The federal judge in New York denied Dapper Labs’ motion to dismiss the suit, stating that the plaintiffs’ claims that its NBA-branded Top Shot Moments NFTs are securities are “plausible.” The judge considered the NFT collection under the four prongs of the Howey test, with the fourth prong determining that the profits expected from an investment must be derived from the efforts of others. The court suggested that the financial viability of the project was dependent on Dapper Labs’ continued success. The ruling may set a precedent for centralized NFT companies entering Web3.
Significance of the ruling
Legal experts agree that the ruling is significant for Dapper Labs and the wider NFT space. While the ruling may not necessarily mean that other NFTs are securities, it will not go unnoticed. Lawyers argue that the creation and control of the Flow blockchain and the marketplace that brought the Top Shots NFTs under the Howey Test’s prongs is an issue of centralization. NFT companies building on public blockchains and using open marketplaces may find the ruling reassuring. However, the ruling highlights the importance of decentralization in the case of NFTs.
NFT companies’ response
NFT companies are confident that their tokens are not securities, with Dapper Labs stating that it believes Moments and other collectibles, digital or otherwise, are not securities under federal law. Fractionalized NFTs are more likely to fall under this category. NFT marketplace OpenSea believes that classifying all NFTs as securities is not plausible, as their varied utility and use cases merit different levels of regulatory scrutiny. The ruling provides regulatory clarity for all NFT projects, public or private, and a road map for structuring NFT projects that minimize securities risks.
Implications for Web3
The Dapper Labs ruling is not good news for Web3 companies that rely on centralized entities to connect consumers and brands. As mainstream brands such as Nike and Starbucks take their first steps into NFTs, the Dapper Labs ruling may serve as a warning sign for centralized companies tapping into Web3. Jeremy Goldman, an intellectual property lawyer, believes that the decision is a significant step in providing regulatory clarity for all NFT projects in the space, public or private.
Sources:
- CoinDesk. “Dapper Labs Ruling Could Spell Trouble for Other Centralized NFT Projects, Experts Say.” CoinDesk, 17 Feb. 2023, www.coindesk.com/dapper-labs-ruling-could-spell-trouble-for-other-centralized-nft-projects-experts-say.
- Investopedia. “Howey Test.” Investopedia, 2022, www.investopedia.com/terms/h/howey-test.asp.
