Dapper Development Lawsuit: What It Means and Why It Matters

Today’s hot topic: Dapper Development Lawsuit.

In 2024, Dapper Labs went on to pay $4 million to settle a class-action lawsuit that alleged “its NBA Top Shot NFTs were unregistered securities.” 

As per the lawsuit, Dapper Labs was exercising control over NFTS – how? Instead of treating them as simple digital collectibles, Dapper Labs treated them as investment contracts. 

Also, the settlement required Dapper to make changes to its business operations, including decentralizing control over the Flow blockchain. 

We have broken down the lawsuit comprehensively below. But before that, here’s everything you need to know about the lawsuit briefly:

Nature Of The Lawsuit: Filed in 2021, this class-action lawsuit claimed that Dapper Labs was involved in selling securities but without registering the same with the U.S SEC (Securities and Exchange Commission). In this context, the plaintiffs alleged that NBA Top Shot NFTs, much like stocks, were subjected to Dapper Lab’s control over future value and supply.

Settlement Details: Dapper Laps settled for 4 million dollars. The court approved the settlement. Also, nearly $1.3 million was charged as the attorney’s fee. 

Business Changes: The settlement also made Dapper Labs agree to some business changes. This includes: 

1. Giving up control of the Flow blockchain and handing it over to the Flow Foundation instead. 
2. Enabling the trading of Top Shot Moments on other marketplaces. 
3. Updating withdrawal procedure, enhancing customer wallets, and improving KYC/AML protocols.
4. Training major personnel on the correct marketing compliance requirements, in accordance with securities laws.

Wider Context: The settlement and lawsuit highlight the ongoing uncertainty with regulations related to NFTS.

About The Dapper Lab NBA Top Shot

In the year 2020, Dapper Labs, with its partnership with the National Basketball Association (NBA), launched NBA Top Shot. It is basically a platform where fans can buy, sell, and trade non‑fungible tokens, or, more popularly called, NFTs.

As we all know, NFTs have separate names based on their categories and types. The digital tokens that you can trade here are called Moments. And these represent the popular highlights of your favorite NBA players.

Yes, you read that absolutely right.

The Dapper Development Lawsuit: What Is The Dapper Lab NBA Top Shot Lawsuit About?

Now, fast forward to 2021.

A group of investors purchased Moments from the Vancouver-based blockchain company. However, after a few days in May, they claimed that these “constitute unregistered securities” under the U.S. federal securities laws.

As per reports, the “plaintiffs allege(d) that Dapper Labs violated United States (US) securities law by selling Moments to professional basketball fans without registering them with regulators.”

In other words, the plaintiffs argued that Dapper Labs was selling unregistered securities under U.S. federal securities law through the sale of NBA Top Shot Moments.

In the Friel v. Dapper Labs, Inc. case that they filed, they claimed that because Dapper Labs controlled both the Flow blockchain and the Top Shot marketplace, it created a closed ecosystem that inflated the NFTs’ perceived value and prevented users from freely withdrawing or trading on other platforms.

According to Law360, the lawsuit alleged that “Moments were sold as unregistered securities and investors were restricted from cashing out, which artificially boosted their market value.”

Major Allegations In The Dapper Development Lawsuit

Some of the major allegations in the Dapper Labs lawsuit, as I have already mentioned above, are related to the incorrect classification of the NFT and the violation of securities laws.

According to the 2021 class action, here are the two major allegations that the group of investors has argued about:

• Moments were offered and sold as unregistered securities under U.S. federal securities laws.
• Dapper Labs restricted purchasers’ ability to withdraw cash or trade Moments on other platforms, artificially boosting their perceived value.

However, in response to the lawsuit, the “high-tech successor to trading cards” denied any wrongdoing. 

They countered the allegation, stating that just like trading cards, the NBA Top Shot Moments are simple “collectible” digital items and not securities. However, they agreed to settle the case.

In a rather long post on his X account, the founder of the digital token company Roham Gharegozlou talked about the allegations:

“These were the main allegations we wanted to prove, and continuing to litigate would have been a distraction from our core mission. The settlement also involves Dapper Labs reaffirming its commitment to the decentralization of Flow, as well as confirming the full transfer of all $FLOW coins as part of the ecosystem development reserve to the Flow Foundation.”

Denied Motion To Dismiss In February 2023

Dapper had filed a motion to dismiss the entire case. However, things did not go according to their plans. On 22nd February 2023, Judge Victor Marrero denied their motion to dismiss.

While Dapper’s social media post stated that the judge “did not conclude the plaintiffs were right, and it’s not a final ruling on the case’s merits,” several sources say other things.

According to Belakit, here’s what Marrero wrote in his decision:

“In sum, Plaintiffs adequately allege that Dapper Labs’s offer of the NFT, Moments, was an offer of an “investment contract” and therefore a “security,” required to be registered with the [US Securities and Exchange Commission].”

The plaintiffs have alleged that Moments met all the key parameters that would automatically make it fall under the category of securities under the Howey test. And these parameters are as follows:

• An investment of money.
• A common enterprise.
• A reasonable expectation of profits.
• Profits derived from the efforts of others.

Additionally, according to CoinDesk, the court also emphasized a critical point. They stated that the control the company has over the Flow blockchain and its marketplace is something that created the expectations of a lot of profit. And this was a result of Dapper’s promotional efforts.

What Is The Settlement Amount For The Dapper Development Lawsuit?

By June 2024, Dapper Labs had decided to end the lawsuit and agreed to a $4 million settlement.

However, there is one thing that I would like to reiterate here: even while they chose to pay the settlement amount, they did not agree to have done anything wrong.

Furthermore, they also stated that the plaintiffs will no longer be able to claim that Moments are securities. Additionally, as part of the deal with the plaintiffs, Dapper Labs also made certain business changes.

For instance, the ones that you MUST know about are the following:

• Transfer control of Flow tokens to a Flow Foundation to promote decentralization.
• Implement annual securities‑law training for staff.

Eventually, on 28th October 2024, the court finally approved the certification of the litigation as a class action. This meant that individuals who have purchased Moments between June 15, 2020, and December 27, 2021, will be able to get a part of the claim.

After analyzing that, the court found the settlement to be fair enough and closed the case. However, if needed, the plaintiffs can appeal for it to be reopened.

When Is The Payout Date For The Lawsuit?

In March 2025, Trading View confirmed that Dapper Labs had agreed to pay “$4M to settle claims that it sold unregistered securities and restricted cash withdrawals, artificially inflating the value of NBA Top Shot Moments.”

Therefore, if all the class members claim their share, an “average payout will be $0.12 per share” that each of them is supposed to get.

Here’s a timeline that you need to take a look at:

Note: The settlement administration or the court has not yet announced the payout date of the settlement. I will update this section once information about the payout is made public.

Wider Significance And Implications:

It is not just a legal precedent. Rather, it’s a case to settle – and here’s why this is so relevant:

1. NFT Regulatory Risk:

The Dapper Development lawsuit highlights that NFTS aren’t beyond the actual scope of securities law. In fact, in some structures – especially when a company has strong control over the marketplace and blockchain – NFTs can easily get dangerous from a legal point of view. 

2. Pressure On Decentralization:

As a part of the legal settlement, Dapper was to give up FLOW tokens. The purpose? To ensure the decentralization of Flow. Moreover, it might serve as evidence for any other blockchain enterprise that is facing an attack. 

3. Culture For Corporate Compliance:

The annual securities-law training requirement implies that Web3 companies might require a stronger legal and compliance program if they provide asset tokenization.

4. Investor Awareness:

To investors and consumers, this case is a sort of lesson – when the project appears to be profitable and promising, purchasing NFTs is not entirely free of risks. Also, these are more than a digital collectible. 

Limitations And Criticisms:

Although the entire settlement resolved a major legal controversy for Dapper, it has its own share of limitations and criticisms. On that note, let’s check out the major criticisms and limitations:

1. There was no admission of accountability on Dapper’s part. Dapper Development didn’t have any formal verdict highlighting misconduct. As a result, the legal conflict is yet to be resolved in the broader context. 

2. The court’s ruling as of February 2023 was confined specifically to the facts of this particular case. As the judge at the time had pointed out, every NFT will become a security. 

3. Hanging over the control of FLOW and ensuring proper training depends on Dapper’s willingness to comply. As a result, you can expect little to no enforcement in this regard. 

4. Depending on specific analyses, the payout that every member of the class would get from the settlement, on average, was relatively low. This is because such details usually depend on the size of the class – how many people are attending the class?

Frequently Asked Questions (FAQs):

Here are some of the questions that most people searching for the Dapper Development Lawsuit have! Take a look at them before you leave:

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