Dapper Labs Settles Class Action Lawsuit Over NFT Securities Allegations
Dapper Labs, known for its NBA-backed non-fungible tokens (NFTs), has reached a settlement regarding a class action lawsuit filed by private plaintiffs. This agreement, pending court approval, addresses accusations that Dapper’s NFTs were sold as unregistered investment contracts. The settlement’s terms, which involve Dapper’s efforts to decentralize its operations, could serve as a blueprint for other entities aiming to sidestep securities liabilities related to digital collectible offerings.
Dapper Labs, recognized for creating CryptoKitties, markets NFTs under the brand NBA Top Shot Moments. These unique digital assets are built on the Flow blockchain, originally a proprietary platform managed by Dapper. Each Moment captures exciting highlights from NBA games, like Steph Curry’s memorable three-pointers, and can be traded similarly to traditional sports cards. However, the lawsuit contended that these NFTs qualified as securities, arguing that they met the criteria established by the Howey test, indicating that purchasers expected to profit from Dapper’s efforts.
Contrary to the plaintiffs’ claims, Dapper maintained that Moments function as collectibles, with buyers acquiring them for personal enjoyment rather than investment purposes. The company asserted that the value of these NFTs is influenced by various aspects, such as a player’s popularity and performance, rather than being tied to Dapper’s financial success or the value of its Flow tokens.
In a pivotal ruling, the court denied Dapper’s motion to dismiss the case, emphasizing several factors: Dapper’s control over the Flow blockchain, its management of the Moments marketplace, and its marketing strategies. The court determined that because Moments were traded on a platform controlled by Dapper, buyers relied on the company’s expertise and ongoing viability, fulfilling the “common enterprise” and “efforts of others” aspects of the Howey test. Additionally, the court noted that Dapper’s marketing efforts, which included emojis suggesting financial returns, contributed to reasonable profit expectations among buyers.
While the court did not specifically decide whether Moments were indeed securities, the settlement stipulates a payment of $4 million and outlines significant operational changes for Dapper. Key changes include relinquishing control over the Flow blockchain, which will now be entirely decentralized; allowing Moments to be traded on external marketplaces; rectifying withdrawal processing delays; and enhancing compliance measures. Furthermore, Dapper’s leadership will undergo training to ensure marketing aligns with securities regulations. The court has tentatively approved the settlement, with a final hearing scheduled for September 17, 2024.
It is important to note that this private settlement does not set legal precedents, and while it may provide insights into regulatory trends, it does not establish binding legal standards. Following this class action resolution and other settlements with the Securities and Exchange Commission (SEC) regarding NFT securities, industry professionals may begin to outline guiding principles. The SEC’s settlements with other NFT projects have emphasized the significance of public messaging that implies asset appreciation and the use of sales revenue for project development, which were also highlighted in the Dapper case.
As industry participants analyze these developments, NFT issuers should remain vigilant regarding aspects such as their control over blockchain technology, the establishment of exclusive marketplaces, the use of sales revenues for project enhancement, and any marketing that implies investment potential. These considerations will be crucial for evaluating risk within NFT projects. For further inquiries, please contact our team as we continue to monitor regulatory and enforcement trends in the NFT space.
