Are NFTs Securities? Class Action Against NBA Partner Sheds Light on the Debate

Are NFTs securities? In 2021, a class action was filed against Dapper Labs Inc. and its CEO, Roham Gharegozlou, in the Southern District of New York. The lawsuit alleged that Dapper Labs’ NFTs (non-fungible tokens), sold as part of a joint venture with the National Basketball Association, were considered securities and were being sold in violation of federal laws.

The so-called “Moments” sold by Dapper, according to the complaint, “constitute an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

This language, explains Baker & McKenzie litigation partner David Zaslowsky, editor of the firm’s blockchain blog, echoes the Howrey test, which the SEC has long used to determine whether or not something is a security.

In February of 2023, a judge in the Southern District of New York denied Dapper Labs’ motion to dismiss. This ruling, says Zaslowsky while stopping short of saying that all NFTs are securities, left open the possibility that they are in particular circumstances, and the issuer may then be held liable for selling unregistered securities. 

This case has now been settled, with the judge giving initial approval to an agreement under which Dapper Labs agreed to pay $4 million into a settlement fund covering such things as payments to class members, attorneys’ fees, and administrative expenses.

The company also agreed to make changes in its business, including giving up control of the blockchain that houses its joint venture with the NBA, allowing some other marketplaces to sell the NBA “Top Shot Moments,” and improving its processing of customer withdrawals. The settlement has no effect other than on the parties to the lawsuit, which does not include regulators.