MIAMI, FLORIDA – MAY 21, 2023 – Shaquille O’Neal, the ex-pro basketball star, is facing a lawsuit concerning supposed securities infractions associated with his NFT collection, named ASTRALs or the Astrals Project. This accusation emerged from a legal document submitted in the Southern District of Florida last week.
A class action lawsuit has been filed by Virginia inhabitant Daniel Harper, who purchased Astrals NFTs and subsequently encountered losses following a downturn in the cryptocurrency market. Harper alleges that O’Neal contravened Section 15 of the Securities Act of 1933. This legislation mandates brokers’ registration with the Securities and Exchange Commission and prohibits the offering and selling of unregistered securities.
In 2022, O’Neal and his son Myles launched Astrals. Damien Guimoneau, a freelance creature artist, was recruited to visualize the project, which incorporates 10,000 NFTs depicting humanoid animals and creatures wielding weaponry and assorted accessories. The NFTs were retailed on Solana, a blockchain analogous to Ethereum in its operation.
O’Neal disseminated the project to his vast online following, proposing giveaways, exclusive Discord channel access, and anticipated investment returns, as claimed by the complaint. In a video shared on social media, O’Neal informed his followers that “we’re not stopping until 30 SOL floor,” signifying his confidence that the least valuable NFT in the Astrals collection would be priced at 30 SOL, approximately $2,400 at the time.
The plaintiff, Harper, acquired 96 Astrals over a twelve-month period. Harper’s provided chart reveals that he spent a maximum of 13.5 SOL on a single NFT.
In the wake of the recent cryptocurrency market plunge, and with NFT collectors reaping minimal rewards from their investments, class action lawsuits are being lodged nationwide. Companies such as Yuga Labs and Dapper Labs are accused of promoting unregistered securities to a public lacking the necessary understanding to accurately evaluate these innovative assets.
The Howey test, a prevalent legal yardstick established in 1946 by the United States Supreme Court in SEC v. W.J. Howey Co., is being utilized by courts to determine if the NFT projects under scrutiny are securities. According to the Howey test, an entity is a security if it satisfies four criteria: It represents an investment of money, it fosters an expectation of investment profits, the monetary investment is in a common enterprise, and any profit originates from the efforts of a promoter or third party.
In Friel v. Dapper Labs, a judgement was made in February of this year declaring Dapper Labs’ NBA Top Shot NFTs as securities. This case will proceed to trial unless Dapper Labs opts for a settlement. While no court has decreed that all NFTs constitute securities, the ruling against Dapper Labs provides some indication of how courts are evaluating these novel assets and the innovative marketing methods utilized. For instance, the judge found that Dapper Labs indirectly indicated profit potential despite never explicitly using the term “profit” in their NFT promotion.
The judge’s verdict stated, “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.”
If the case proceeds, it’s likely that the Howey test will be applied to the Astrals by the presiding judge.
O’Neal isn’t the sole celebrity entangled in NFT-related legal issues. Recently, Madonna, Justin Bieber, and Jimmy Fallon were implicated in a class action lawsuit alleging undisclosed financial compensation in their promotion of Bored Ape Yacht Club NFT sales.
Section 15 of the Securities Act of 1933
The Securities Act of 1933, often referred to as the ’33 Act, was enacted following the stock market crash of 1929 to regulate the issuance of new securities, such as stocks, bonds, or any other type of securities traded on the open market. Section 15 of this act primarily deals with unlawful representations and penalties.
Section 15 states that it is unlawful for any person, directly or indirectly, to effect any transaction in, or to induce the purchase or sale of, any security unless they are a registered broker-dealer. This means that anyone selling or marketing securities needs to be registered with the Securities and Exchange Commission (SEC) to do so legally. If they aren’t registered, they are in violation of this section of the Act.
In the context of the lawsuit previously mentioned, the accusation against Shaquille O’Neal is that he violated this section of the Act by selling NFTs (which in this case are being argued as securities) without being a registered broker-dealer.
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