Dapper Labs Agrees to $4M Settlement in Class Action Securities Suit

Dapper Labs has reached a tentative settlement agreement 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.

If approved by District Court Judge Victor of the Southern District of New York (SDNY), the settlement would bring a nearly three-year-long legal battle to an end.

In 2021, the class action plaintiffs accused Dapper Labs’ flagship product – the NBA Top Shot Moments – of being unregistered securities because, they said, the value of the NFTs would increase with the popularity of the project as a whole. Plaintiffs also claimed that Dapper Labs prevented investors from cashing out for “months on end” to keep value locked on the platform, and did not allow Moments to be bought or sold on outside NFT platforms at the time the suit was filed.

In subsequent court filings, Dapper Labs’ lawyers vehemently denied that their NFTs were securities, arguing that they were essentially digital basketball cards.

The settlement agreement filed Monday would bar the plaintiffs from claiming that their NFTs are securities, in exchange for an aggregate settlement fund of $4 million. According to Gharegozlou, the money will go towards payments to the class members, attorneys’ fees and settlement administrator costs.

Dapper Labs also agreed to other business changes to settle the suit, according to a representative for the company, including the implementation of mandatory employee training programs focused on “compliance with federal securities laws and ethical marketing practices” and increased payment and withdrawal speeds.

Additionally, Dapper Labs promised to relinquish any control over its remaining FLOW tokens to the Flow Foundation to ensure the decentralization of the Flow ecosystem.

Though the proposed settlement is between Dapper Labs and investors, not regulators, Gharegozlou told CoinDesk the agreement was a “great start” towards increased legal clarity on whether the company’s NFTs can be classified as securities.

“We are continuing to push for more overarching regulatory clarity to showcase that consumer NFTs are not financial products and, as such, should be regulated under well-established consumer protection regimes at the state level,” Gharegozlou said. “This includes pushing for legislation at the federal level that makes it clear that consumer product NFTs, such as NBA Top Shot, are not subject to federal financial regulation.”

Gharegozlou added that the company is “not aware of any regulator” like the U.S. Securities and Exchange Commission (SEC) claiming that Moments NFTs are securities. In April, Fortune reported that the SEC had at one time launched an investigation into Dapper Labs but closed it in September 2023.