Dapper Labs has agreed to a $4 million settlement to conclude a class-action lawsuit alleging that its NBA Top Shot Moments nonfungible tokens (NFTs) were unregistered securities. This settlement reaffirms that the NFTs are not securities, according to CEO Roham Gharegozlou.
The lawsuit, initiated in 2021 by a class of investors led by Jeeun Friel, claimed that Dapper Labs issued unregistered securities through its NBA Top Shot Moments NFTs. However, a New York District Court filing on June 3, 2024, revealed the settlement agreement, which stipulates that the plaintiffs must cease asserting that the NFTs are securities.
In a June 4 post on X, Gharegozlou announced, “Great news! We @dapperlabs today announced a legal resolution that reaffirms two of our most important positions: After discovery, it was understood and agreed that @Flow_blockchain is a decentralized public network and that digital collectibles like @NBATopShot are not securities in the same way trading cards are not securities.”
The settlement comes after legal discovery determined that the NFTs operate on a decentralized public network, similar to trading cards, which are not classified as securities. Gharegozlou emphasized that continuing the litigation would have distracted from Dapper Labs’ core mission.
As part of the settlement, Dapper Labs will make business changes to further decentralize its Flow blockchain, including transferring control over any outstanding FLOW tokens to the Flow Foundation. The company also committed to implementing an annual staff training program covering federal securities regulations.
Despite these changes, Gharegozlou noted that no regulator, including the United States Securities and Exchange Commission (SEC), has alleged that Moments NFTs are securities. The SEC had previously investigated Dapper Labs but dropped the case in September 2023.
The settlement awaits acceptance by District Judge Victor Marrero, who previously denied Dapper Labs’ motion to dismiss the claim in February 2023. The judge had suggested that the NFTs could be considered securities under the Howey test, a legal framework for classifying securities.
The class action lawsuit claimed that Dapper Labs’ flagship product, NBA Top Shot Moments, was an unregistered security because its value increased with the project’s popularity. Plaintiffs also alleged that Dapper Labs blocked investors from cashing out and restricted the trading of Moments NFTs to its platform. Dapper Labs countered these allegations, comparing the NFTs to baseball or Pokémon trading cards.
To address the trading restrictions, Dapper Labs granted other marketplaces permission to trade Moments NFTs in March 2022, allowing broader access to the tokens.
The legal determination that NBA Top Shot NFTs are not securities is grounded in their operation on a decentralized public network, which aligns them more closely with traditional collectible trading cards rather than investment contracts under the Howey test. This legal interpretation underscores the evolving nature of digital assets and their classification within the regulatory framework.
