How Ripple’s case may be impacted following SEC’s run-in with the NBA
- A New York court judge refused to dismiss a class-action lawsuit filed against Dapper Labs for allegedly offering NFTs without first registering with the SEC.
- It is now being speculated how the outcome of this case will impact the SEC vs. Ripple case.
On 22 February, a New York court judge refused to dismiss a class-action lawsuit filed against Dapper Labs for allegedly offering Non-Fungible Tokens [NFTs] without first registering with the US Securities and Exchange Commission (SEC).
The lawsuit claimed that Gharegozlu and Dapper Labs violated federal securities laws by offering the NBA Top Shot Moments NFT collection without first registering with the SEC.
The decision on the motion to dismiss this class-action lawsuit comes more than a year and a half after the class-action lawsuit was filed in New York. In September 2022, Dapper Labs filed a motion to dismiss the lawsuit, claiming that its collection of digital basketball cards is not a security.
What is the ruling about?
The ruling claimed that Dapper Labs’ FLOW tokens, while not necessarily securities, are critical to the overall scheme at issue. This has fueled speculation that the NFT collection “might be” securities, which may impact Ripple’s SEC case.
District Judge Victor Marrero of the Southern District of New York ruled:
“The Court finds that Plaintiffs’ allegations render each consideration under Howey facially plausible and survive Defendants’ Motion to Dismiss the alleged violation of Sections 5 and 12 of the Securities Act.”
Plaintiffs claimed that without FLOW tokens, no Flow Blockchain transactions can be validated. Indeed, the Flow Blockchain’s ‘Proof-of-Stake’ mechanism requires FLOW to power it and incentivize miners to validate transactions. Therefore, FLOW’s utility adds value to Moments by allowing the network to agree on ownership and the price of each transaction.
Judge Marrero added:
“The Court is persuaded that the [plaintiff’s complaint] adequately alleges pooling to survive the Motion to Dismiss.”
He also cited plaintiffs’ claims that Dapper Labs used funds from the sale of Moments for fundraising and maintaining the value of FLOW tokens. Moreover, his conclusion that what Dapper Labs offered was an investment contract under Howey is too narrow, while other NFTs may not be securities.
It is the specific scheme through which Dapper Labs offers Moments that creates the necessary legal relationship between investor and promoter to establish an investment contract, and thus a security.
Dapper Labs took to Twitter to share that the order:
“Only denied our motion to dismiss the complaint at the case’s pleading stage. The judge did not conclude the plaintiffs were right, and it’s not a final ruling on the case’s merits.”
Dapper Labs has now been given three weeks to respond to the lawsuit.
Today’s order in the Friel v. Dapper Labs matter – which the Court described as a “close call” – only denied our motion to dismiss the complaint at the case's pleading stage. The judge did not conclude the plaintiffs were right, and it's not a final ruling on the case's merits.
— Dapper Labs (@dapperlabs) February 22, 2023
How the ruling might impact the SEC vs. Ripple Case
According to legal counsel James A. Murphy, the Top Shot NFT decision is only a decision on a motion to dismiss the complaint that assumes all allegations in the complaint are true.
1/ A federal judge in New York has ruled that a complaint "plausibly alleges" that Dapper Labs' initial sale of NBA Top Shot NFTs qualifies as a security under the Howey test.
I don't believe this ruling should impact the analysis in the @Ripple case.
And here's why…
— MetaLawMan (@MetaLawMan) February 22, 2023
Ripple, on the other hand, is at the summary judgement stage, in which the judge examines the evidence presented by the parties. The judge also emphasized,
“Not all NFTs offered or sold by any company will constitute a security.”
Besides, the judge cited the fact that while Top Shots trade on a private blockchain, Ripple trades on a public blockchain.