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

Jun 3, 2024

As a researcher with a background in law and blockchain technology, I have closely followed the legal battle between Dapper Labs and the investors who accused the NFT company of violating federal securities laws. The proposed settlement agreement, if approved by the court, would bring an end to this nearly three-year-long dispute.

I’ve discovered that Dapper Labs has reached an preliminary understanding with a band of investors who took legal action against the non-fungible token (NFT) firm and its founder and CEO Roham Gharegozlou. The investors accused Dapper Labs and Gharegozlou of breaching federal securities laws.

Should Judge Victor of the Southern District of New York (SDNY) give his approval, this drawn-out legal dispute between the parties, lasting almost three years, will reach its conclusion with the implementation of the proposed settlement.

In the year 2021, the accusers in a class action lawsuit alleged that Dapper Labs’ leading product, NBA Top Shot Moments, were unregistered securities. They based this claim on the fact that they believed the worth of these NFTs (Non-Fungible Tokens) would rise with the growing popularity and success of the project as a whole. Furthermore, the plaintiffs asserted that Dapper Labs had restricted investors from selling their Moments for extended periods, keeping the value trapped on their platform. At the time the lawsuit was initiated, it was impossible for Moments to be traded on any external NFT marketplaces.
In subsequent legal documents, Dapper Labs’ legal team strongly contended that their NFTs should not be classified as securities. They compared these digital assets to collectible basketball cards instead.
The filing of the settlement agreement on Monday prevents the plaintiffs from arguing that their NFTs are classified as securities, with a total settlement fund of $4 million being established. As stated by Gharegozlou, this amount will be utilized for compensating class members, covering legal fees, and settling administrative expenses.

Dapper Labs reached an agreement in the ongoing lawsuit, their representative confirmed. Alongside other business modifications, they will introduce mandatory compliance training for employees on federal securities laws and ethical marketing practices. Additionally, they aim to enhance payment and withdrawal speeds for improved user experience.

Further, Dapper Labs committed to transferring all their own FLOW tokens to the Flow Foundation, thereby promoting the decentralized nature of the Flow platform.

Dapper Labs’ settlement with investors marks a significant step forward in clarifying the regulatory status of their NFTs, according to Gharegozlou. He shared this perspective in an interview with CoinDesk.
Gharegozlou advocated for greater regulatory clarity on a broader scale to make it clear that consumer NFTs do not fall under the category of financial products. Consequently, they should be governed by existing consumer protection laws at the state level. Additionally, he emphasized the need for federal legislation to clarify that consumer-focused NFTs, such as NBA Top Shot, are exempt from federal financial regulations.
As an analyst, I can share that during a recent discussion, Gharegozlou mentioned that Dapper Labs isn’t aware of any regulatory body, such as the U.S. Securities and Exchange Commission (SEC), classifying Moments NFTs as securities. Previously, Fortune reported that the SEC had initiated an investigation into Dapper Labs but concluded it in September 2023.

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2024-06-04 04:40