Shaquille O’Neal Must Defend Some Allegations In Suit Over Astrals Project NFTs

On August 16, 2024, Judge Moreno of the Southern District of Florida ruled that legendary basketball player Shaquille O’Neal must face some allegations in a proposed securities class action regarding his promotion of Astrals Project nonfungible tokens (“NFTs”). 

Astrals was a project involving a collection of 10,000 NFT 3D avatars.  The court explained that “NFTs are unique cryptographic tokens that exist on a blockchain”—a digital database—and “can represent digital or real-world items, like art and real estate.  Like art or real estate, NFTs can be tied to some amount of monetary value, and investors may bet on the value increasing and thus [the NFTs] can be sold for a profit.”  The plaintiffs alleged that the Astrals NFTs were designed to promote investment in a virtual world—known as the Astralverse—where users could socialize, play, and interact with other users. 

The Astrals Project also involved the creation of a decentralized autonomous organization (“DAO”) for “incubating innovative projects.”  DAOs are organizations where no one person or group is in charge of overseeing operations; rather, the members decide together using a set of rules stored on the blockchain that everyone in the DAO agrees on.  The Galaxy token was the governance token of the Astrals Project DAO, giving token holders the right to participate in the DAO’s decision-making process.

According to Law360, the suit alleged that Mr. O’Neal heavily promoted the NFTs across social media and used the Astrals Project to hype the cryptocurrency exchange FTX, and vice versa, prior to FTX’s infamous collapse in November 2022.  When FTX collapsed, Mr. O’Neal posted a gif to Discord signifying his solidarity with the Astrals Project, but never posted again.  Plaintiffs alleged that Mr. O’Neal fled the project, causing the Astral products (NFTs and Galaxy tokens) to plummet in value, damaging investors. 

While the court agreed with O’Neal that plaintiffs did not show that he was a “controlling person” over the Astrals Project and that certain claims were time-barred, the court agreed with plaintiffs that, for the purpose of defendants’ motion to dismiss, the NFTs and Galaxy tokens are securities subject to the federal securities laws.  As Law360 explained, the Court applied the “Howey test,” which is used to determine whether a particular scheme is a security, and found that the plaintiffs invested money in a common enterprise, and that their investments were “substantively passive” and depended on the “entrepreneurial or managerial efforts of others.”