Dapper Labs Settles Class Action Suit over NBA Top Shot Moments for $4 Million

2024-06-03 20:49:21

Shalini Nagarajan

Last updated:

June 4, 2024 00:49 EDT | 2 min read

Dapper Labs, the firm behind the NBA Top Shot and other notable digital collectibles, recently settled a class action lawsuit with dissatisfied customers. The lawsuit contended that Top Shot NFTs were unlawfully offered securities.

The firm said it agreed to pay $4m to settle the lawsuit against them. This figure will be divided to compensate those affected by the lawsuit, cover the lawyers’ fees, and pay administration costs.

To settle the lawsuit, users suing Dapper will give up their ability to argue that Top Shot NFTs are securities, according to CEO Roham Gharegozlou.

The settlement “further asserts Dapper Labs’ conviction that NBA Top Shot Moments are not securities under federal law,” Dapper Labs said in a statement. “With this new found legal clarity, the company will be able to pave the way for continued growth and innovation.”

Dapper Labs Faced Legal Action for Alleged Securities Violations

Back in 2021, a group of users sued Dapper Labs over its NBA Top Shot Moments NFTs. They argued that these NFTs were essentially unregistered securities because their value depended on the entire project’s success. Additionally, the lawsuit claimed Dapper Labs restricted users from withdrawing their money for a long time and limited trading options for these NFTs.

The plaintiffs further accused the firm of profiting from selling unregulated investments by manipulating the market.

Dapper Labs disagreed, claiming its NFTs were more like digital versions of traditional basketball trading cards, not securities.

Judge Highlighted Potential Securities Issue with Top Shot NFTs

But in February last year, a federal judge delivered a significant blow to Dapper, ruling that the lawsuit could advance. The judge concluded that Top Shot NFTs potentially fit the criteria for a securities offering.

The judge’s decision hinged on the detail that Top Shot NFTs are hosted on Flow, a blockchain network Dapper created. The judge characterized Flow as a “private” blockchain. This is unlike decentralized networks such as Bitcoin or Ethereum, which lack control from a single entity.

Additionally, the judge determined that statements Dapper and its representative made suggested that the collectibles would appreciate in value over time.

Pledge to Improve Practices

The company has stated in the past that Flow is adequately decentralized. Gharegozlou reaffirmed this stance now, emphasizing that Flow is not controlled by Dapper. Instead, the independent Flow Foundation oversees the network.

Dapper Labs, as per a company representative, has consented to additional business adjustments to resolve the lawsuit. These include mandating employee training programs concentrating on compliance with federal securities laws and ethical marketing practices, as well as enhancing payment and withdrawal processing speeds.

Moreover, Dapper Labs has committed to transferring control of its remaining FLOW tokens to the Flow Foundation to guarantee the Flow eco’s decentralization.

Last year, Dapper Labs experienced its third round of layoffs following a notable downturn in the NFT industry.

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