NFTs
Dapper Labs Settles NFT Securities Lawsuit
Dapper Labs has reached a tentative settlement with a group of investors who sued the non-fungible token (NFT) company and its co-founder and CEO Roham Gharegozlou for allegedly violating federal securities laws.
The settlement, if approved by U.S. District Court Judge Victor Marrero of the Southern District of New York (SDNY), will end a legal battle that has lasted nearly three years.
In 2021, class action plaintiffs accused Dapper Laboratories main product, NBA Top Shot Moments, from being unregistered titles. They argued that the value of NFTs would increase with the overall popularity of the project and claimed that Dapper Labs restricted investors from withdrawing money for long periods by keeping the value locked on the platform. At the time, Moments could not be bought or sold on external NFT platforms.
Lawyers for Dapper Labs have consistently denied that its NFTs are securities, comparing them to digital basketball cards. The settlement agreement would prohibit plaintiffs from claiming that their NFTs are securities in exchange for a $4 million settlement fund. This fund will cover payments to class members, attorneys’ fees, and administrative settlement costs.
According to Gharegozlou, Dapper Labs also agreed to implement several business changes, including mandatory employee training on compliance with federal securities laws and ethical marketing practices, as well as increasing payment and withdrawal speeds. Furthermore, the company committed to transferring control of its remaining shares FLOW Tokens to the Flow Foundation to ensure the decentralization of the Flow ecosystem.
Although the agreement is with investors and not regulators, Gharegozlou described the agreement as a positive step towards greater legal clarity regarding the classification of NFTs. “We continue to push for more comprehensive regulatory clarity to show that consumer NFTs are not financial products and should be regulated under well-established consumer protection regimes at the state level,” he said. Gharegozlou also mentioned ongoing efforts to advocate for federal legislation that would clearly exempt consumer product NFTs like NBA Top Shot from federal financial regulation.
Gharegozlou added that the company is not aware of any regulator, including the U.S. Securities and Exchange Commission (SEC), claiming that Moments NFTs are securities. Fortune reported in April that the SEC investigated Dapper Labs but closed the inquiry in September 2023.