Dapper Labs reaches settlement in 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 District Court Judge Victor Marrero of the Southern District of New York (SDNY), will conclude a legal battle that has lasted nearly three years.

In 2021, the class action plaintiffs accused Dapper Labs’ flagship product, NBA Top Shot Moments, of being unregistered securities. They argued that the value of the NFTs would rise with the project’s overall popularity and claimed Dapper Labs restricted investors from cashing out for extended periods, keeping the value locked on the platform. At the time, Moments could not be bought or sold on external NFT platforms.

Dapper Labs’ lawyers have consistently denied that their NFTs are securities, likening them to digital basketball cards. The settlement agreement would prohibit the plaintiffs from asserting that their NFTs are securities in exchange for a $4 million settlement fund. This fund will cover payments to class members, attorneys’ fees, and settlement administration costs.

According to Gharegozlou, Dapper Labs has 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. Additionally, the company has committed to transferring control of its remaining FLOW tokens to the Flow Foundation to ensure the decentralization of the Flow ecosystem.

Though the settlement is with investors and not regulators, Gharegozlou described the agreement as a positive step towards greater legal clarity regarding the classification of NFTs. “We are continuing to push for more overarching regulatory clarity to showcase 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 clearly exempts consumer product NFTs, such as NBA Top Shot, from federal financial regulation.

Gharegozlou added that the company is unaware 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 had investigated Dapper Labs but closed the inquiry in September 2023.