Dapper Labs, the company that mints NBA top shots into non-fungible tokens (NFT) - called NBA Top Shots, has reached a settlement agreement to finally put an end to a 3-year-long investor class action, which alleged the company violated US federal securities laws.
NBA Top Shots NFTs were an instant hit when they were released during the NFT bull market in 2020, under a partnership between the NBA and Dapper Labs. The top four most valuable NFTs of this collection are all shots by LeBron James, with the most expensive clip reached a high of USD$230,000. Dapper Labs was also the creator of another hugely popular and valuable NFT collection called CryptoKitties.
Three years ago, a group of NBA Top Shots NFT purchasers brought a class action accusing that the company's NBA Top Shot was unregistered securities because, according to the investors, the value of the NFTs would increase with the popularity of the project as a whole. This was a curious argument as it would be thought to extend to most kinds of collectibles, which are not usually considered regulated products.
The purchasers also argued that Dapper Labs prevented them from cashing out the NFTs for "months on end", and did not allow the NBA Top Shots NFTs to be exchanged on third-party NFT platforms.
Dapper Labs denied the accusations. In a court filing, their lawyers argued that the NBA Top Shot NFTs are basically digital basketball cards, which are collectibles that have a market value.
This position has never been, and would seem unlikely to be, tested in court now that the parties have agreed on a settlement, which still needs to be approved by the Court. Under the deal Dapper Labs will pay the purchasers a total of USD$4million, in exchange for the plaintiffs to relinquish their claims that the NFTs are securities.
A spokesperson of Dapper Labs also said that they are planning on implementing a mandatory employee training program focused on:
compliance with federal securities laws and ethical marketing practices.
In addition, Dapper Labs has promised to give up control over its remaining FLOW token to Flow Foundation to ensure the decentralisation of the Flow blockchain and ecosystem.
No regulator has brought any case against Dapper Labs in relation to the Top Shot NFTs yet though in April this year, Fortune reported that the SEC had once launched an investigation into Dapper Labs but closed it in September 2023.
This settlement has nevertheless shows the lack and need of legal clarity surrounding the nature of NFTs and other crypto assets. The risks that NFTs could be categorised as financial products or securities, particularly if promoted in certain ways is still a very real one in an environment of regulation by enforcement.
Dapper Labs' CEO, Ghregozlou said that:
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
It seems only legislation from parliament will make clear whether NFTs are consumer goods or financial product.
By M Bacina, S Pettigrove, J Huang