Are NBA Top Shot Moments securities? A wake-up call for how NFTs are managed

Alun Evans
Published in
6 min readMay 4, 2023

By Alun Evans, CEO of Freeverse, a technology company and platform powering the future of digital ownership with #LivingAssets™, dynamic NFTs that can evolve and appreciate in value according to how they are actually used, creating a whole new level of utility beyond collectibles.

NBA Top Shot is a blockchain-based, virtual trading card platform created by Dapper Labs that launched in 2020. Built on Dapper’s Flow blockchain, Top Shot “packs” and Moments (short video clips from NBA games) can be purchased using any payment method — no crypto or digital wallet necessary — which helped it quickly become one of the most popular NFT projects ever.

By February 2021, Top Shot was doing over $224 million in sales volume with 80,000+ unique buyers, generating $45 million in a single day. On Top Shot’s dedicated marketplace, users could also buy, sell, and trade Moments, just like many other NFT collectibles.

However, the popular project is now facing some serious legal battles. A class-action lawsuit is underway to decide whether or not Moments are actually unregistered securities.

Buyers of NBA Top Shot’s Moments filed the lawsuit against Dapper Labs and its founder Roham Gharegozlou in May 2021. The plaintiffs alleged that the value of the digital collectibles was directly tied to the success of the Dapper-owned Flow blockchain, which, under the “Howey Test,” is one of the key indicators that Moments fit the U.S. Securities and Exchange Commission’s (SEC) definition of a security.

In a preliminary hearing in February 2023, the court denied Dapper Lab’s motion to dismiss the case, allowing the lawsuit to move forward and potentially setting an important precedent for whether or not regulators will bring securities enforcement actions against other NFT issuers.

Putting NFTs to the Howey Test

The U.S. Supreme Court established the Howey Test in 1946, and it is used to determine whether an asset qualifies as a security. Under the Howey Test, an asset can be considered a security if it meets all of the following criteria:

1. There’s an investment of money

2. There must be a “common enterprise,” meaning the investment is interwoven and dependent upon the efforts and success of the company — or any third party who is offering or selling it.

3. The investor must be motivated by the prospect of earning a profit.

4. Profit must be derived from the “efforts of others.” In other words, the investor must rely on the efforts of a promoter or a third party to generate a profit.

If an asset meets all four criteria, it is subject to SEC securities regulations. But the Howey Test doesn’t say anything about modern-day digital assets like NFTs. Nor has the SEC published any official guidelines yet on how to evaluate them. Therefore, the Howey Test still must be applied on a case-by-case basis.

So far, a majority of NFTs have been considered “utility” tokens (by their creators and the broader market), rather than security tokens. According to Michael Juul Rugaard, CEO & Co-founder of The Tokenizer, some common understanding has emerged around when NFTs should definitely not be considered securities. For example:

  • If an NFT is used as a blockchain-based, digital “deed” to prove the originality and/or provenance of a digital or physical asset, such as a piece of artwork
  • If NFTs represent collectibles in a 1:1 ratio (1 asset = 1 NFT), such as digital in-game items
  • If NFTs are used to represent concert tickets, as a way to efficiently & securely transfer ownership of the ticket and fight attempts of fraud and scams

Certainly, not all NFTs can be deemed securities, and indeed it’s possible to issue NFTs in a way that doesn’t violate federal securities law. But the other critical issue with the NBA Top Shot case is the use of the Dapper Lab’s blockchain, Flow, to record the transactions and power the marketplace where Moments are bought, sold, and traded.

The problem with how most NFTs are currently managed

There are two main problems with the way that NFTs are created and offered to consumers. The first is related to the control of the platform, and the second is related to where the data associated with NFT is stored.

Regarding the first issue, in the preliminary hearing to determine whether or not Moments should be considered securities, the judge pointed out that it is plausible Moments’ value is derived almost entirely from the continued operation of the Flow blockchain by Dapper Labs. The company has created a dedicated $725M fund to build its ecosystem, and is the major player in maintaining it. While this is fine on its own, Dapper also created the online marketplace where NBA Top Shot Moments are sold and traded, restricting the possibility to trade the assets on any other blockchain or marketplace.

Therefore, Moments’ buyers must rely on Dapper Labs’ expertise and managerial abilities, as well as the company’s continued success and existence. This sets Moments apart from, say, physical basketball trading cards that can be bought and sold in many different marketplaces.

If Dapper Labs uses capital raised via the sales of Moments to maintain its blockchain, it may mean the “common enterprise” and “efforts of others” criteria of the Howey Test could also be met. It is this maintenance of the Flow blockchain underlying Moments that was supposedly “fundamental” to the court’s decision to allow the lawsuit to proceed.

So, why does this matter? As Coindesk points out, it’s a strong indication that regulators may treat NFT projects or platforms built on private networks differently.

However, it is the second issue — that of data location and availability — that may cause even greater disruption in the future.

A majority of today’s NFTs function as a simple “URL” or link pointing to a set of data, or a file, that is stored off the blockchain. In Dapper Labs’ case, the NFTs are not only managed by Flow but part of the NFT metadata is stored in the company’s private servers, a rather common practice in many other NFT collections. In another major example, the NFT metadata for all of the tokens of Sorare’s extremely popular fantasy football game is stored on Sorare’s private servers.

Should this token’s data disconnect from the actual NFT — due to server changes, a hack, or in a worse-case scenario event like the company ceasing its operations, then the token data on the blockchain may simply end up linking to nothing and the value of the NFT will be zero.

There are decentralized alternatives to store NFT data, such as the peer-to-peer protocol, InterPlanetary File System (or IPFS). It can be used when data storage needs to be fully transparent and verifiable, but the data is too large to store on the blockchain — which is often the case for large media files or dynamic NFTs (dNFTs). With IPFS, anyone — even an asset’s owner — can maintain the content, verifying that the asset properties exist and are always available.

The critical need for proper infrastructure to support digital ownership

“As with most blockchain ventures, the more centralized the NFT offering, the greater the risk that the offering will be deemed a security.”

Jeremy Goldman, intellectual property (IP) lawyer and partner at law firm Frankfurt Kurnit Klein & Selz

Dapper Labs will soon have an opportunity to present its full defense. But as NFT use cases and distribution options continue to grow, properly structuring the underlying infrastructure of digital assets to provide true digital ownership must be a priority. While private networks offer many benefits, centralizing control can mean more difficulty maintaining trust and security in the long-term. It can also lead to a “common enterprise,” which, under the Howey Test, means that any investment is dependent upon the efforts and success of the company or third party selling the asset. This restricts how an asset can be bought, sold, stored, and ultimately, who really controls it.



Alun Evans

Alun is CEO and co-founder of — the home of “Living Assets” (NFT 2.0).