On August 16, 2024, Judge Federico A. Morena of the United States District Court for the Southern District of Florida granted in part and denied in part a motion to dismiss a putative class action asserting claims under Sections 5, 12(a)(1), and 15 of the Securities Act of 1933 against an NFT company, certain of its affiliates, and their celebrity promoter. Harper v. O'Neal, No. 23-21912, 2024 WL 3845444 (S.D. Fla. Aug. 16, 2024). Plaintiffs alleged that defendants had impermissibly engaged in the offer and sale of unregistered securities when they promoted a collection of non-fungible tokens ("NFTs") allegedly designed to be used in a virtual world (or "metaverse") that the company planned to build. The Court held that plaintiffs had sufficiently alleged that a celebrity promoter of the NFTs was a "seller" under Section 12 of the Securities Act, but that certain allegations were time-barred, and the promoter was not a "control person" under Section 15 of the Securities Act.
The Court first addressed the question of whether the promoter was a statutory "seller," a status that the Court explained is not limited to those who transfer title or interest in property but also extends to those who "successfully solicit" the purchase. O'Neal, 2024 WL 3845444, at *3 (citing Pinter v. Dahl, 486 U.S. 622 (1988)). The Court rejected defendants' argument that the promoter was not a statutory seller because he had not communicated personally with plaintiffs. Instead, the Court held that posting videos online and using social media to sell NFTs was sufficient to support a claim of solicitation, just as newspaper and radio advertisements are. Id. at *4 (citing Wildes v. BitConnect Int'l PLC, 25 F.4th 1341 (11th Cir. 2022) (holding that "keeping up with the times" means "podcasts, social media posts, or online videos and web links" can be understood as "conveying solicitations.")).
The Court further held, however, that the celebrity promoter was not a "control person" within the meaning of Section 15 of the Securities Act, because plaintiffs had not alleged that the promoter had day-to-day involvement with the company or had the power to control its actions. Id. at *8. Allegations that the promoter had founded the project, assembled a management team, and been essential to the creation of the NFTs at issue were not sufficient. Id. at *8.
Addressing statute of limitations issues, the Court held that allegations regarding one type of NFT at issue—which had been added in an amended complaint—related back to the filing of the original complaint, because the original complaint had referenced, for example, "tokens and NFTs" and "various NFT incentives," such that defendants "could have reasonably expected that the [additional] token claim would have been brought against them." Id. at *6. Plaintiffs' claims were time-barred, however, as to alleged NFT purchases made more than one year before the litigation was filed. Id. at *5.
Finally, the Court rejected defendants' argument that the particular NFTs at issue were not "securities" subject to the Securities Act. Rather, the Court agreed with plaintiffs that the particular tokens here qualified as an "investment contract"—one of the definitions of "security" under the Securities Act—because they involved "(1) an investment of money, (2) a common enterprise, and (3) the expectation of profits to be derived solely from the efforts of others." Id. Specifically, the Court held that defendants' NFT project constituted a "common enterprise" because "investors [were] dependent upon the expertise or efforts of the investment promoter for their returns." Id. at *9. The Court noted that the NFTs here were to be used by the company to create both the metaverse and a "decentralized autonomous organization for incubating innovative projects"—such that "the success or failure of the overall investment lies in the hands of [d]efendants." Id.
The Court further held that plaintiffs satisfied the "expectation of profits" prong because defendants "controlled the website and marketplace where [the NFTs] were bought and sold," had intellectual property and other ownership rights in the NFTs, and made clear that they were attempting to "develop and grow the entire operation, which could lead an objective investor to see a possibility of investment return." Id. at *10. Moreover, the Court determined that plaintiffs were not motivated by a "desire to use or consume the item purchased," including because the metaverse in which the tokens could be used had not yet been created. Id. The Court emphasized that it was ruling only on the pleadings at the motion‑to-dismiss stage and was not reaching the question of whether all NFTs qualify as investment contracts. Id. at *8.
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