Time: 2024-06-18
Dapper Labs, the issuer of NBA-endorsed non-fungible tokens (NFTs), has agreed to a settlement offer in a class-action lawsuit regarding allegations that these NFTs were sold as unregistered securities. The settlement includes Dapper making changes to decentralize its network, which may serve as a model for others looking to avoid securities liability when offering digital asset NFT collectibles. The lawsuit claimed that NBA Top Shot Moments, NFTs depicting NBA game highlights, met the criteria of an investment contract under the Howey test.
Dapper argued that the NFTs were collectibles rather than securities, as their value was based on factors such as player popularity and performance, not tied to Dapper's profitability. However, the court denied Dapper's motion to dismiss, highlighting the company's control over the Flow blockchain and marketplace for NFT sales, as well as its marketing efforts using emojis suggesting financial returns. The settlement includes a payment of US$4,000,000 and various business changes, such as decentralizing the Flow blockchain and relinquishing control of reserve Flow tokens.
The settlement is pending final approval in a court hearing scheduled for September 17, 2024. While civil litigation settlements do not set legal precedents, they can provide insights for industry participants. The Securities and Exchange Commission (SEC) has also settled cases regarding NFT securities, focusing on statements implying asset appreciation and the use of sales revenues for project development. NFT issuers are advised to be cautious about technical control over blockchain, creating exclusive marketplaces, using revenues for project development, and marketing suggesting investment value.
NFT projects should be assessed based on their structure, technology decisions, and marketing practices to understand the associated risks. The SEC's Division of Enforcement closed an investigation into Dapper without recommending enforcement action, following settlements with other NFT issuers. It is unknown how Dapper's operational changes related to the Flow blockchain influenced the SEC's decision. For more information on NFT regulatory and enforcement considerations, interested parties can reach out to the team monitoring these developments closely.
In conclusion, the settlement between Dapper Labs and the plaintiffs in the class-action lawsuit highlights the increasing regulatory scrutiny on the NFT market, particularly regarding the classification of NFTs as securities. Issuers and participants in the NFT space are advised to be mindful of legal requirements and regulatory expectations to avoid potential liabilities in the future.
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