NFT's first lawsuit? NBA Top Shot users sue Dapper Labs and its CEO

NFT (Non-fungible Token) seems to have become the most popular blockchain branch product in 2021. It has quickly moved from a certificate of ownership and a mark of intellectual property to the investment field. The prices of various new highs are staggering. At the same time, it inevitably brings hidden worries: where is the legal boundary of NFT investment, and will it be recognized as a token financing transaction? Recently, an ongoing lawsuit in the United States once again reminded us that although NFT was born in the chain world, it is inevitably subject to legal inspection and restrictions in the traditional world.

(1) Prosecution facts

NBA TOP Shot is a blockchain-based platform jointly launched by Dapper Labs and the NBA, which will upload the highlight moments of various stars to the chain and make them into NFTs. This project was very popular at the beginning of this year. According to statistics, as of the end of February this year, the transaction volume has exceeded 260 million US dollars, an increase of 390%, and the number of buyers has exceeded 110,000.

The rock band Goo Goo Dolls launches its first NFT series: Golden Finance News, the rock band Goo Goo Dolls tweeted, "We will release limited-edition, environmentally friendly NFTs for every city we come to this summer. Available on our tour, so be on the lookout to scan the QR code at the venue to be directed to the landing page to get it." [2022/7/18 2:19:31]

On May 12, an NBA Top Shot user sued Dapper Labs and its CEO, alleging that the NFT it sold was essentially an unregistered security. The plaintiff alleged that Dapper Labs should be registered with the US Securities and Exchange Commission (SEC), But the latter didn't do that. Separately, the plaintiffs allege that the company used NBA Top Shot to deliberately prevent collectors from withdrawing their funds "for months" to artificially prop up the platform's market value. At present, this allegation is still private in nature, and all allegations are based on the "personal knowledge" of the plaintiff. The defendant, Dapper Labs, has 30 days to respond to the subpoena, but has not yet taken any action.

August Sander's photography NFT series was delisted due to copyright disputes, and the publisher will file a lawsuit: Golden Finance News, August Sander's great-grandson Julian Sander wants to bring his great-grandfather's iconic photos to the blockchain through OpenSea, the series will constitute this The total profile of an iconic photographer, with 10,700 photos, these NFTs will be given away for free, and users only need to pay gas fees. Julian's goal is to "protect August Sander's legacy on the blockchain".

The project launched on February 10 and is run by the August Sander family estate led by Julian, and within a few weeks, more than 400 ETH was traded in OpenSea’s secondary sale.

August’s grandson Gerd (Julian’s father) sold these photos to SK Stiftung Kultur as a collection. SK retained these rights until 2034 and issued a takedown notice to OpenSea. OpenSea issued a statement and issued a statement on March 7. Sales are suspended.

Julian stated that the statement is invalid and will definitely go to court to find out who the real owners of these NFT copyrights are.

August Sander was a German portrait photographer born in 1876. He has been described as "the most important German portrait photographer of the early 20th century". (nftevening) [2022/5/8 2:58:06]

(2) Howey test

NFT aggregator and marketplace Mintverse releases new version: On January 7th, NFT aggregator and marketplace Mintverse announced the release of an improved version of its tracker. Mintverse Beta 2.0 aims to reflect the increased interest in NFTs in the Web3 market, and will introduce a full-stack NFT tracking solution for Binance Smart Chain (BSC) and Ethereum (U.Today)[2022/1/8 8:33:31]

As far as the direction of the lawsuit is concerned, the court should use the Howey Test again to determine whether the transaction between the plaintiff and the defendant has the characteristics of an investment contract, and then determine whether the NFT card is a security.

The so-called Howey test contains four conditions: 1. Is it an investment of money; 2. Whether the investment is expected to generate profits; 3. Whether the investment is for a specific business (common enterprise); 4. .Whether the benefit arises from the efforts of the issuer or a third party.

The programmable NFT platform Async Art has released programmable music works of five new artists: On July 29, the programmable NFT platform AsyncArt recently announced that it has launched the new Async Music (AsyncMusic), and 5 new artists have released it on Async programmable music. The five artists are female producer Vérité who values NFT technology, electronic music producer PLS&TY, independent singer TerraNaomi, DJ Maëlstrom, and composer and pianist Cristina Spinei. Async said that it will also hold various virtual events, exclusive interviews with musicians, etc. in the future. [2021/7/29 1:22:23]

Compared with the definition of securities in other countries, this standard can cover a wide range of securities, so that "Crypto Mom" SEC Commissioner Hester Peirce has also criticized that using this standard to measure whether encrypted assets are Securities "have not worked well for the industry as a whole."

Potentially against the plaintiffs in this lawsuit, NBA TOP Shot’s user agreement requires players to agree to its “primary use of NFTs as game objects, not for investment or speculation.” However, plaintiffs also do claim that the platform has investors “expecting to profit” from its marketing materials, which hype the platform’s success and the inherent scarcity of NFTs.

(3) If some NFTs are securities?

my country's definition of securities is relatively narrow. According to the first paragraph of Article 2 of the "Securities Law", the scope of securities is only "stocks, corporate bonds, depositary receipts and other securities recognized by the State Council according to law." Therefore, even if NFT cards similar to NBA TOP Shot are recognized as securities in the United States, it is difficult to make the same recognition in my country. However, according to Article 2, Paragraph 4 of the Securities Law, securities issuance and trading activities outside the territory of the People's Republic of China, which disrupt the market order in the territory of the People's Republic of China and damage the legitimate rights and interests of domestic investors, shall be dealt with in accordance with the relevant provisions of this law and punished. pursue legal responsibility. Therefore, if NFT is recognized as a security abroad, its issuance and trading activities may also be included in my country's protection jurisdiction.

If some NFTs can be identified as securities, or at least considered to have the nature of securities, then the question that follows is whether their production and distribution may constitute an ICO behavior that is explicitly prohibited by the Chinese government.

To say that NFT may have the nature of securities, and its issuance constitutes an ICO, is at first glance a ridiculous proposition. After all, we all know that the essential feature of NFT is that the smallest asset unit is 1, which cannot be divided. This is fundamentally different from other homogeneous tokens or stock securities with percentage modifications. However, there are still two issues worthy of further consideration.

First, the "non-homogeneous" feature of NFT is inherently vague. On the Ethereum blockchain, NFTs are created based on standards such as ERC-1155. Tokens created using the ERC-1155 standard ensure uniqueness, so we say NFTs are "non-fungible". However, creating an NFT is not technically difficult. If we mint a large number of basically identical NFTs and distribute them to the market, will a "homogeneous token" be formed naturally? Just like renminbi, each renminbi is not exactly the same with each other, and has a correspondingly different number, but the different number does not affect the identification of its type.

Second, there are already "segmented" NFT projects. Just like one of the original intentions of the NFT concept is to solve the circulation problem in the art collection industry, it is very attractive to NFT owners to break NFT into fragmented income for investors and further accelerate the circulation speed. force. For example, a decentralized project called "F-NFT" enables NFT owners to tokenize partial ownership of their works, thereby promoting the sale and purchase of NFT percentages. Another project called "DAO-Fi" breaks down non-fungible ERC-721 tokens into fungible ERC-20 tokens, allowing buyers to take partial ownership of NFTs. In this way, NFT is equivalent to being an indivisible specific asset, creating other tokens that can be replaced with each other. If financing is carried out in this way, the behavior mode is very similar to the ICO that is banned in my country.

NFT issuers should be cautious about selling fractional interests in NFTs, as SEC Commissioner Hester Pierce urged at the Draper Goren Holm Summit on March 25. “You better be careful that you’re not creating something that’s an investment product — that is a security.” In China, similar financing behaviors are likely to be identified as ICO behaviors and be cracked down by regulators.

Tags：

TUSD