Dapper Labs has reached a tentative settlement with investors who accused the non-fungible token (NFT) company and its co-founder and CEO, Roham Gharegozlou, of violating federal securities laws. This settlement, pending approval by District Court Judge Victor of the Southern District of New York (SDNY), could end a nearly three-year legal battle.
Background of the Lawsuit
In 2021, plaintiffs in a class action lawsuit claimed that Dapper Labs’ flagship product, NBA Top Shot Moments, were unregistered securities. They argued that the value of these NFTs was tied to the overall popularity of the project. Additionally, they accused Dapper Labs of preventing investors from cashing out for extended periods and restricting the buying and selling of Moments on external NFT platforms.
Dapper Labs’ Defense
Dapper Labs’ lawyers consistently denied that their NFTs were securities, likening them to digital basketball cards rather than financial instruments.
Settlement Agreement Terms
The proposed settlement, filed on Monday, would prevent plaintiffs from asserting that the NFTs are securities. In return, Dapper Labs will establish a $4 million settlement fund. According to Gharegozlou, this fund will cover payments to class members, attorneys’ fees, and settlement administration costs.
Additional Business Changes
As part of the settlement, Dapper Labs has agreed to several business changes:
- Compliance Training: Implementation of mandatory employee training on federal securities laws and ethical marketing practices.
- Improved Payment and Withdrawal Speeds: Enhancements to ensure faster transactions.
- Decentralization of FLOW Tokens: Transfer of control over remaining FLOW tokens to the Flow Foundation to promote ecosystem decentralization.
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Regulatory and Legal Clarity
Though the settlement is with investors and not regulators, Gharegozlou expressed optimism about achieving greater legal clarity on whether NFTs are securities. He emphasized the need for legislation to classify consumer NFTs, such as NBA Top Shot, under state-level consumer protection regimes rather than federal financial regulations.
Gharegozlou also stated that no regulatory body, including the U.S. Securities and Exchange Commission (SEC), has deemed Moments NFTs as securities. While the SEC did investigate Dapper Labs, the investigation concluded in September 2023 without further action.
