A federal district court in New York granted final approval to a seven-figure attorney fees award and a multimillion-dollar settlement between Dapper Labs Inc., the firm behind National Basketball Association non-fungible tokens, and a class of purchasers who alleged that these digital assets sold by the defendant were unregistered securities.
Jim Walker, a Perkins Coie partner who counsels blockchain businesses on regulatory risk avoidance and mitigation and is not involved in the case, observed that the attorneys should be “careful about what to offer and how you offer it, and if you market something in any media that you are directly marketing or have some input or control as an investment, you have exposure.”
“But beyond that, the additional step that Dapper Labs case took was thinking about what your customer is actually getting when they purchase this NFT,” Walker said in an interview. “What is it that gives it value to use? If you control the ability to use that, that may be a factor in creating this investment issue. And that was certainly something that was important here.”
Laurence Rosen, a Rosen Law Firm partner who represented the class, and Kenneth P. Herzinger, a Paul Hastings partner who represented Dapper Labs, did not respond to requests for comment.
Dapper Labs first announced its blockchain application, NBA Top Shot, in July 2019 as a joint venture between itself, the NBA and the NBA Players Association, court records show. The purpose of the NBA Top Shot app was primarily to provide a platform to sell “moments,” the alleged securities at issue in this action.
Moments are NFTs, digital assets whose authenticity and ownership can be recorded on a blockchain, and these show a digital video clip of an NBA highlight, such as a star player’s game-winning shot. Dapper Labs sold these in packs, which contain multiple moments during a release, or individually on a secondary marketplace such as one it created and controlled.
By late February 2021, Dapper Labs’ combined market capitalization from sales of moments on the NBA Top Shot app had netted $1.9 billion. However, as court records show, Dapper Labs has not filed any registration statement for the sale of moments with the U.S. Securities and Exchange Commission at any point.
Throughout the three years of litigation, Dapper Labs argued that its tokens were no more securities than trading cards. However, while U.S. District Judge Victor Marrero of the Southern District of New York was careful not to classify all NFTs as securities, he held that Dapper Labs’ control over the blockchain satisfied the pleading of an investment contract. That ruling on the motion to dismiss may have later led Dapper Labs to relinquish control of the blockchain and to permit other marketplaces to sell the tokens to mitigate the securities-like characteristics.
Now, Marrero has entered two orders approving the $1.3 million in attorney fees to the Rosen Law Firm, which served as counsel for the class, and the $4 million settlement between Dapper Labs and the class. In doing so, Dapper Labs pledged to address the business practices that purchasers said made the sale of the NFTs similar to investment contracts.
Walker, the blockchain expert, noted that had the case been decided in 2021, the settlement would have likely been much larger. He said the NFT explosion lasted into 2022, when there were all sorts of projects and versions of NFTs. However, that wave blew up with FTX’s implosion because people began questioning the value of NFTs.
“What you see happening is the real development around NFTs isn’t necessarily in a particular image or art or music or film,” Walker said. “But there’s a closer relationship between the NFT and something else that is translated into some sort of value or tangible translation of an asset. That’s a very different entity than what was put on the market every day back in the 2021 period.”