Dapper Labs may be in for a rough ride in their class action lawsuit against their Top Shot NFTs, according to attorneys from Skadden, Arps, Slate, Meagher and Flom LLP. Last week, a US District Judge allowed the lawsuit to move forward, alleging that Top Shot Moments are securities. This could set a precedent for how NFTs are treated in the future.

The Howey Test is used to determine whether an asset is a security. It has four main pillars: Has money been invested? Is it a common enterprise? Is there a reasonable expectation of profit? Is the profit derived from the efforts of others? The judge determined that the plaintiff’s argument that Dapper Lab’s NBA Top Show Moments passes the Howey Test was plausible.

The key factor in the case is Dapper Lab’s sole control over the marketplace where Moments were bought and sold. This gives them the ability to “significantly, if not entirely, dictate[d] Moments’ use and value.” The plaintiffs argued that Moments’ royalty structure makes them a horizontal commonality, meaning there was a “pooling of funds tied to the success of the overall venture.” The court agreed there was adequate evidence to the horizontal commonality argument.

It is unclear whether the case will proceed to trial or if a settlement may be reached. However, the court’s decision could have a lasting impact on the NFT industry. Other projects should be on notice that the Howey Test could be applied to their projects. This could lead to more regulation and scrutiny of NFTs in the future.