Dapper Labs settlement affirms NBA NFTs are not securities

Dapper Labs’ $4 million settlement deal to conclude a class-action lawsuit against the company maintains that NBA Top Shot nonfungible tokens (NFTs) are not securities, according to CEO Roham Gharegozlou.

According to a New York District Court filing on June 3, Dapper Labs reached a settlement agreement with a class of investors who sued the company in 2021, alleging that it issued unregistered securities through its NBA Top Shot Moments NFTs.

In a June 4 X post, Gharegozlou said the case’s legal discovery determined the NFTs were on “a decentralized public network,” which meant they “are not securities in the same way trading cards are not securities.”

“These were the main allegations we wanted to prove, and continuing to litigate would have been a distraction from our core mission,” he noted.

According to the settlement agreement, Dapper Labs is willing to pay the $4 million settlement if the plaintiffs, led by Jeeun Friel, agree to stop asserting that the NFTs were securities.

Dapper is making business changes to decentralize its Flow blockchain. This includes depositing and transferring control over any outstanding FLOW tokens to the Flow Foundation.

It also committed to establishing a mandated annual staff training program that includes federal securities regulations.

Gharegozlou added that the company is “not aware of any regulator,” such as the United States Securities and Exchange Commission (SEC), alleging Moments NFTs are securities. In April, crypto.news reported that the SEC had previously initiated an investigation into Dapper Labs, but it was subsequently dropped in September 2023.

Meanwhile, the latest settlement has yet to be accepted by District Judge Victor Marrero, who denied Dapper’s motion to dismiss the claim in February 2023 after concluding that the NFTs could be considered securities under the Howey test, a legal framework for classifying securities.

Dapper Labs was served with a class action lawsuit in 2021, accusing the company’s flagship product, NBA Top Shot Moments, of being unregistered securities because the value of the NFTs would increase with the project’s overall popularity.

Plaintiffs further claimed that Dapper Labs blocked investors from cashing out for “months on end” to keep funds locked on the platform and that Moments could not be bought or traded on other NFT platforms at the time the lawsuit was filed.

Dapper’s lawyers dismissed the claim, instead comparing the NFTs to baseball or Pokémon trading cards.

The group also claimed Dapper prevented them from selling the NFTs on other platforms, which the most recent settlement agreement states Dapper Labs prevented in March 2022 by granting other marketplaces permission to trade the tokens.