How Ripple’s Case May Be Affected After SEC Showdown With 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 speculated how the outcome of this case will affect the SEC case against Ripple.

On February 22, a New York District Court judge refused to dismiss a class action lawsuit filed against Dapper Labs for allegedly offering non-redeemable coupons [NFTs] without first registering with the US Securities and Exchange Commission (SEC).

The lawsuit alleged 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 ruling on the motion to dismiss this class action comes more than a year and a half after the class action was filed in New York. In September 2022, Dapper Labs filed a motion to dismiss the lawsuit, arguing that the collection of digital basketball cards is not security.

What is the decision?

The decision claimed that Dapper Labs’ FLOW tokens, while not necessarily securities, are critical to the overall system under consideration. This fueled speculation that the NFT collection “may 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 make every consideration under Howey plausible and survive Defendants’ motion to dismiss for alleged violation of Sections 5 and 12 of the Securities Act.”

The plaintiffs claimed that without FLOW tokens, no Flow Blockchain transaction can be validated. Indeed, 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 the ownership and price of each transaction.

Judge Marrero added:

“The Court is convinced that the [plaintiff’s complaint] sufficiently alleges concentration to survive the motion to dismiss.”

It also cited plaintiffs’ claims that Dapper Labs used funds from the sale of Moments to raise funds and maintain the value of FLOW tokens. Furthermore, 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 underwriter to enter into an investment contract, and thus a security.

Dapper Labs took to Twitter to share that the order:

“He denied our motion to dismiss the complaint only at the trial stage of the case. The judge did not conclude that the plaintiffs were right and is not a final decision on the merits of the case.”

Dapper Labs now has three weeks to respond to the lawsuit.

How the ruling might affect the SEC vs. Ripple case

According to legal counsel James A. Murphy, the Top Shot NFT decision is simply a decision on a motion to dismiss the complaint that assumes all allegations in the complaint are true.

Ripple, on the other hand, is in the summary judgment stage, in which the judge examines the evidence presented by the parties. The judge also pointed out,

“Not all NFTs offered or sold by any company will constitute security.”

Besides, the judge mentioned the fact that while Top Shots trades on a private blockchain, Ripple trades on a public blockchain.

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