In a 64-page opinion by Judge Victor Marrero of the United States District Court for the Southern District of New York, released February 22, the Howey Test: Is an investment a security? It included a case that will become famous in the future as an application example of the test of whether or not.
‘NBA Top Shot’ is an investment deal
As Dapper Labs and its CEO reject motions to dismiss unregistered securities sales charges against them, the court offered a lesson. If you’re going to market NFTs using your own private blockchain and marketplace, it would be wise to hire a good compliance lawyer beforehand.
Judge Marrero denied the motion to dismiss and allowed the class-action lawsuit against Dapper Labs to proceed in this case, which the court also accepted as the first case to determine whether an NFT is an investment contract in light of the famous Howie test. .
Related article: Judgment that the popular NFT “NBA Top Shot” may be classified as securities
Some features in common with several other NFT projects were highlighted, such as the use of private blockchain networks and the presence of native tokens backed by the network’s founders.
The court ruled that DapperLab’s popular NFT collection, NBA Top Shots, is an investment deal offered to the public with the prospect of profit. This, and the fact that NFT’s financial success is related to the success of DapperLab’s own platform, met two of Howie’s requirements. The Howie Test is a four-factor test used by the U.S. Supreme Court to determine whether certain assets fall under the jurisdiction of the U.S. Securities and Exchange Commission (SEC).
Judge Marrero began his opinion by defining an “investment contract” as “a contract, transaction, or program under which a person invests (his) assets in a joint venture” that yields “profit solely from the efforts of the entrepreneur.” started.
And NFT is defined as “a digital asset whose authenticity and ownership can be recorded on the blockchain”. According to Judge Marrero, “Moments (NBA Top Shot NFTs) are digital videos of highlights from NBA games, including incredible dunks and game-changing shots.”
Judge Marrero noted that DapperLab’s control of its own private blockchain showed how the business was being used to market Moment.
“The economic realities and technical implications between the FLOW token, the Flow blockchain and Moment are consistent with plaintiffs’ allegations and support the court’s ruling.”
Judge Marrero ruled that “the company’s efforts to develop and maintain an ecosystem for trading satisfactorily meet the third requirement of the Howie Test.”
Positioning of Private Blockchain
Furthermore, “Dapper Labs’ implied promise to maintain the flow blockchain and support transactions on the marketplace drove Moment’s value.” forms the basis of the
Judge Marrero raised concerns that DapperLab had restricted Moment trading to only the Flow blockchain, which was developed by DapperLab as a faster and cheaper alternative to the Ethereum blockchain.
This point raises questions about profits and transaction fees, but on a technical level it is “making the blockchain private” and Moment’s “purchasers rely on DapperLab’s knowledge, operational commitment and success.” had to rely on the continuation and survival of the Judge Marrero agreed with the plaintiffs and ruled that the case was completely different from “public blockchains such as Bitcoin.”
Judge Marrero made the right decision regarding Dapper Labs. However, in the future, courts could make the wrong decision in a way that would be detrimental to projects that used to sell NFTs using Layer 2 platforms built on public blockchains and platforms that didn’t rely on the native token ecosystem. have a nature. That’s obviously going too far.
For example, unique items that are usually sold individually, such as works of art, would not be easily compatible with this decision. There are also concerns around NFT creators who partner with companies like DapperLab to promote and sell their products.
Judge Marrero responded that the precedent referred to by DapperLab did not apply to this issue. This is because the “inherent work of art” sold in the case did not have a “causal relationship with the seller.”
Difference from Art NFT
Art NFTs and Moments also have another difference. Art NFTs are always points with intrinsic value. In its motion to dismiss, DapperLab argued that Moment should not be considered an investment contract because of its intrinsic value.
Judge Marrero did not accept that argument, noting that DapperLab’s bylaws stated more than once that Moment “has no inherent or intrinsic value.”
By the way, messaging app Kik raised millions of dollars through an initial coin offering (ICO), but it was later determined that the tokens were securities. It was also determined that he sold something that had no intrinsic value. “Unlike real estate, (KIN) tokens have no intrinsic value and are not profitable without an ecosystem to generate demand,” the court noted.
There are certainly reasons why platforms built on private blockchains should be treated differently than those on public blockchains. That’s probably why Voice, the NFT marketplace company, recently moved to a public blockchain.
Platforms that use native tokens, such as Rarible with its RARI token, may also need to strategize following the court’s ruling. Private blockchains specializing in NFTs, such as WAX, may also need to review their promoter compensation schemes.
But going forward, the safest approach for NFT creators is to partner with companies that have built their platforms from the ground up using public blockchains, without platform native tokens or direct means of controlling the value of their NFTs. .
And the NFTs sold using such platforms and least likely to be judged as investment deals would be the art NFTs that are the foundation of the emerging digital art movement.
Mr. Paul Paray: One of the founders of LLC (Limited Liability Company) ArtSwap in New Jersey, USA.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
| Image: Markus Spiske/Unsplash (edited by CoinDesk)
｜Original: Dapper Labs Ruling Dunks on Private Networks