Dapper Labs, renowned for NBA Top Shot and other prominent digital collectibles, recently reached a resolution in a class action lawsuit filed by dissatisfied customers. The lawsuit alleged that Top Shot NFTs were unlawfully classified as securities.
The company disclosed that it will pay $4 million to settle the lawsuit, which will be distributed to compensate affected individuals, cover legal fees, and manage administrative expenses.
In settling the lawsuit, plaintiffs relinquish their claims that Top Shot NFTs constitute securities, as stated by CEO Roham Gharegozlou.
Dapper Labs asserted that the settlement reinforces its belief that NBA Top Shot Moments do not fall under the category of securities according to federal law. In a statement, the company expressed confidence that this legal clarification will foster continued growth and innovation.
Dapper Labs Faced Legal Action for Alleged Securities Violations
In 2021, a cohort of users initiated legal action against Dapper Labs concerning its NBA Top Shot Moments NFTs. Their contention was that these NFTs effectively constituted unregistered securities due to their value being contingent on the overall success of the project. Moreover, the lawsuit alleged that Dapper Labs imposed prolonged restrictions on users’ withdrawal of funds and limited trading options for these NFTs.
The plaintiffs additionally accused the company of benefiting from the sale of unregulated investments through market manipulation.
In response, Dapper Labs refuted these claims, asserting that its NFTs more closely resembled digital renditions of traditional basketball trading cards rather than securities.
Judge Highlighted Potential Securities Issue with Top Shot NFTs
In February of the previous year, a federal judge dealt a substantial setback to Dapper by allowing the lawsuit to proceed. The judge determined that Top Shot NFTs could conceivably meet the criteria for a securities offering.
The crux of the judge’s decision rested on the fact that Top Shot NFTs reside on Flow, a blockchain network developed by Dapper. The judge characterized Flow as a “private” blockchain, distinguishing it from decentralized networks like Bitcoin or Ethereum, which lack control from a singular entity.
Furthermore, the judge found that statements made by Dapper and its representatives suggested that the collectibles would appreciate in value over time.
Pledge to Improve Practices
Previously, the company has asserted that Flow is sufficiently decentralized. Gharegozlou reiterated this position, highlighting that Flow is not under Dapper’s control. Instead, oversight of the network is managed independently by the Flow Foundation.
According to a company representative, Dapper Labs has agreed to implement further business modifications to address the lawsuit. These measures include implementing employee training programs focused on adhering to federal securities laws and ethical marketing practices, as well as improving the speed of payment and withdrawal processing.
Additionally, Dapper Labs has pledged to transfer control of its remaining FLOW tokens to the Flow Foundation to ensure the decentralization of the Flow ecosystem.