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To the Moon? Emojis can be financial advice, says judge

QED, NFTs are securities

A New York federal judge has ruled that emojis used in certain situations can only "objectively mean one thing" – financial advice indicating a return on investment.

Southern District of New York judge Victor Marrero was talking about the use of rocket ships, positive stock charts and money bag emojis by people promoting NFT projects like Dapper Labs and the NBA's Top Shots Moments. The organizations are being sued in a class action case alleging they violated US securities laws.

Moments are NFTs of basketball game highlights designed to be similar in collectibility to physical sports cards. The question in this case is akin to several other crypto cases which have tried to figure out whether cryptocurrencies or NFTs are securities or not.

"The foundational question of liability … is whether Dapper Labs's offer and sale of Moments amounts to an offer or sale of a security," to which Marrero believes there's at least enough cause to not dismiss the case outright.

NFT? Security

Dapper Labs filed a request to have the case dismissed last August, and in a decision [PDF] filed last week, Marrero said the plaintiffs had adequately shown that NBA Top Shots were an investment vehicle as defined by the Howey Test.

According to Marrero's decision, Howey requires plaintiffs to prove three things: that Moments were first an investment of money that, second, was made in a common enterprise, and third, with the expectation of profit "from the essential entrepreneurial or managerial efforts of others." 

As far as Marrero is concerned, the plaintiffs' claims "render each consideration under Howey facially plausible."

To summarize, it's obvious money was invested in Moments – and a lot of it. A single Moment of a LeBron James dunk sold for $208,000, while one investor had reportedly purchased Moments worth a total of over $15.6 million.

Launched in 2020, "by late February 2021, Dapper Labs's combined market capitalization from sales of Moments on the NBA Top Shot application had reached $1.9 billion," Marrero wrote in his decision. 

As for why Moments are a common enterprise, the decision turns to the Flow blockchain that Dapper Labs created for NBA Top Shots and other NFT projects. "Plaintiffs allege that Dapper Labs has pooled Moments purchasers' funds to raise additional capital, outside of and along with revenue, to ensure the Flow Blockchain does not collapse." Among other pooling arguments, the judge said the whole affair is certainly a common enterprise.

Third is where those emojis come in.

"Although the literal word 'profit' is not included in any of the Tweets, the 'rocket ship' emoji, 'stock chart' emoji, and 'money bags' emoji objectively mean one thing: a financial return on investment," Marrero wrote.

To back that up, Marrero said the court only had to turn to the subjective observations of Moments purchasers who he said made clear the intent was to profit. That LeBron dunk NFT, for example, was purchased for six figures because its buyer believed it "was worth seven figures right away."

Here come the feds

Lawyer Lisa Braganca, a former Securities and Exchange Commission branch chief whose law firm specializes in recovering investment losses and defending financial professionals, said in a tweet that "users of these emojis are hereby warned of the legal consequence of their use."

With a federal court having issued a decision that NFTs are classifiable as securities, expect more legal pushes from the government to take action on the crypto world, of which it has been very interested in of late. 

The US administration isn't alone: South Korea recently said it would begin regulating cryptocurrencies and virtual assets (i.e. NFTs) as securities, and Hong Kong made a similar decision last week.

The plaintiffs in the US class action are asking for a jury trial and an award of damages and other compensation. NBA Top Shots hit a two-year low for monthly sales in November last year after four months of steady declines, falling to volumes not seen since it launched in December 2020. ®

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