Dapper Labs is the company that was known originally for CryproKitties.  That ran on the Ethereum blockchain.  But Dapper Labs then developed its own blockchain, called Flow, to house NBA Top Shot, its co-venture with the NBA.  Top Shot is best known for selling “Moments,” which are often compared to sports trading cards.  Dapper Labs clips NBA highlights and turns them into NFTs (non-fungible tokens), which can be bought and sold. 

In May 2021, a class action lawsuit was brought against Dapper Labs, alleging that the NFTs it sold on its platform constituted unregistered securities that were sold in violation of federal securities laws.  According to the complaint,  Moments are “securities” because, among other things, they  “constitute an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”  That language, of course, comes from the well know Howey test that has been used by the SEC for decades to determine whether something is a security.  Dapper Labs’ main defense compared the NFTs to baseball or Pokémon trading cards, arguing they should not be considered securities.

On February 22, 2023, in denying Dapper Labs’ motion to dismiss, Judge Victor Marrero of the Southern District of New York was the first district court judge to hold that the issuer of an NFT offered an “investment contract” and, therefore, can potentially be held liable for selling unregistered securities.   This was certainly not a holding that all NFTs are securities.  Indeed, the court specifically noted that its decision was “narrow,” saying also:  “Not all NFTs offered or sold by any company will constitute a security, and each scheme must be assessed on a case-by-case basis.”  The critical factor here was the “particular scheme” by which Dapper Labs offered Moments.  In any, event, there was enough in the complaint to get past a motion to dismiss.

Now, the case has been settled.  On June 4, 2024, Judge Marrero entered an Order that gave initial approval to a settlement agreement under which Dapper Labs agreed to pay $4 million into a settlement fund.  That amount was to cover all payments (e.g., class members, attorneys’ fees, administrative expenses).  In addition, Dapper Labs agreed to adopt or continue certain business changes that address the Complaint and the court’s February 22, 2023 decision.  Dapper Labs acknowledged that the lawsuit was a substantial contributing factor to some or all of the following business changes: (1) as of October 20, 2021, Dapper no longer had control over the Flow blockchain; (2) effective March 17, 2022, four other marketplaces have the authority to display and sell NBA Top Shot Moments without any objection from Dapper, the NBA or NBA Players Association, such that off marketplace transactions could be made with the full licensing rights of the NBA and NBA Players Association on four other approved marketplaces; and  (3) Dapper corrected withdrawal delays and began processing customer withdrawals within 2-10 business days around October 2021.  Dapper Labs also agreed to implement mandatory employee training programs focused on “compliance with federal securities laws and ethical marketing practices.”

Dapper Labs CEO Roham Gharegozlou, who was also a defendant, posted as follows on X:

Great news! We @dapperlabs today announced a legal resolution that reaffirms two of our most important positions:

After discovery, it was understood and agreed that @Flow_blockchain  is a decentralized public network and that digital collectibles like  @NBATopShot are not securities in the same way trading cards are not securities.

It is not clear what “agreement” he was referring to.  The settlement has no effect other than on the parties to the lawsuit, which, notably, does not include any regulators.  Perhaps Dapper Labs takes comfort in earlier reports that the SEC had investigated the company but closed the case near the end of 2023.  In any event, resolving this lawsuit will certainly allow Dapper Labs to, as its CEO said,  focus “on what matters – building great experiences for our fans.”


David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. David has been included in Chambers for his expertise in international arbitration. He is the editor of the firm's blockchain blog.