Dapper Labs Settles NBA Top Shot NFT Lawsuit for $4M

Dapper Labs, the blockchain company behind NBA Top Shot and CryptoKitties, settled a federal class action lawsuit for $4 million in 2024 after plaintiffs alleged the company sold unregistered securities through its NFT collectibles platform. The case, Friel v. Dapper Labs, Inc., was filed in May 2021 in the U.S. District Court for the Southern District of New York, Case No. 1:21-cv-05837-VM, and became one of the most closely watched NFT legal battles in the industry’s history.

The settlement was preliminarily approved in June 2024 and received final court approval on October 28, 2024. Plaintiffs who purchased or acquired NBA Top Shot Moments from June 15, 2020 to December 27, 2021 — covering approximately 33 million Moments — were eligible to submit claims. The case also carries significant regulatory implications, having once prompted a separate SEC investigation that the agency ultimately closed without action in September 2023.

Lawsuit Timeline and Updates

2020 — NBA Top Shot Launches, Moments Market Explodes

NBA Top Shot launched in 2020 as one of the first mainstream NFT platforms, allowing users to buy, sell, and trade video highlight clips of NBA players — called “Moments” — as digital collectibles. The platform was built on Flow, a proprietary blockchain developed and initially operated by Dapper Labs. Within months, the platform generated hundreds of millions of dollars in sales volume as the NFT market hit a frenzy.

The appeal was straightforward. Users bought packs of Moments at a discount and resold individual cards on Dapper’s marketplace at a profit. Dapper and its CEO Roham Gharegozlou promoted this activity through social media, including posts with rocket ship and money bag emojis that courts would later scrutinize as evidence of profit expectations.

2021 — Liquidity Crisis, Withdrawal Lockouts, and First Lawsuit

As the NFT market cooled in 2021, Top Shot users encountered a serious problem. Dapper Labs restricted users from withdrawing their funds for extended periods — sometimes months — trapping capital on the platform. Users who wanted to liquidate their holdings could not. At the time, Moments could only be bought and sold on Dapper’s own marketplace. No third-party platform was permitted to transact them.

On May 12, 2021, plaintiff Jeeun Friel filed a putative class action against Dapper Labs and Gharegozlou in the U.S. District Court for the Southern District of New York. The lawsuit alleged that NBA Top Shot Moments were unregistered investment contracts — securities — under the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiffs argued that Dapper made hundreds of millions of dollars selling these instruments without registering them with the SEC.

October 2021 — Dapper Begins Decentralizing Flow Blockchain

Before the case advanced further, Dapper Labs took its first major step toward addressing the core vulnerability in the lawsuit. As of October 20, 2021, Dapper relinquished day-to-day control of the Flow blockchain, transferring governance to the independent Flow Foundation. This move was significant. The lawsuit’s strongest argument rested on the claim that Flow was a private blockchain, controlled solely by Dapper. A more decentralized network weakened that argument.

Dapper also resolved the withdrawal bottleneck. Beginning around October 2021, the company processed customer withdrawals within 2 to 10 business days — a substantial improvement over the prior months-long delays that had frustrated users and fueled the lawsuit.

March 2022 — Third-Party Marketplaces Authorized

Effective March 17, 2022, Dapper Labs permitted four external marketplaces to display and sell NBA Top Shot Moments with the full licensing rights of the NBA and NBA Players Association. This addressed another plaintiff allegation: that Dapper’s exclusive control of the secondary market artificially trapped users and reinforced their dependency on the company’s ongoing management of the ecosystem.

These changes did not end the lawsuit. The core question remained unresolved: were Moments securities at the time they were sold?

February 22, 2023 — Federal Judge Rules Moments “Plausibly” Securities

Judge Victor Marrero of the U.S. District Court for the Southern District of New York issued a landmark ruling on February 22, 2023, denying Dapper’s motion to dismiss. His conclusion: NBA Top Shot Moments “plausibly” met the definition of an investment contract under the Howey Test, the long-standing Supreme Court standard for determining what qualifies as a security.

The ruling turned on three key findings. First, the Flow blockchain was originally a private network built and controlled by Dapper — meaning Moments’ value depended entirely on Dapper’s continued operation of the infrastructure. Second, capital raised through Moments sales was used to fund Flow’s development, creating a pooled common enterprise. Third, Dapper’s own promotional materials — including social media posts with rocket ship and money bag imagery — communicated an expectation of profit to buyers.

Judge Marrero was careful to limit his ruling. He called it “a close call” and stated explicitly that not all NFTs would qualify as securities. “Each scheme must be assessed on a case-by-case basis,” he wrote. But the ruling allowed the lawsuit to proceed and sent a clear signal to the broader NFT industry that securities law could reach digital collectibles under the right factual circumstances. That context informed the rest of the case.

September 2023 — SEC Closes Investigation Without Action

Fortune reported in April 2024 that the SEC’s Division of Enforcement had opened a separate investigation into Dapper Labs. The agency closed that investigation in late September 2023, without recommending any enforcement action to the Commission. The SEC did not publicly disclose the scope or basis of the investigation, and Dapper said the company had never been contacted by the agency.

The SEC’s decision to stand down did not eliminate the private class action. It did, however, reduce one major source of legal exposure for Dapper Labs. Industry observers noted the closure provided some comfort — but not immunity — to other NFT issuers.

June 2024 — $4 Million Settlement Announced and Preliminarily Approved

On June 3, 2024, Dapper Labs announced it had reached a $4 million class action settlement. The court granted preliminary approval shortly thereafter. The settlement fund would cover monetary relief for class members, attorneys’ fees not to exceed $1.33 million (one-third of the fund), up to $40,000 in litigation expenses, and up to $20,000 in contribution awards to the named plaintiffs.

The estimated average recovery was $0.12 per Moment purchased during the class period. After deducting attorneys’ fees and costs, the net recovery dropped to approximately $0.08 per Moment. Given that approximately 33 million Moments were purchased during the class period, the per-claim amounts were modest — but the case’s value lay beyond the payout figures.

As part of the settlement, Dapper Labs agreed to a significant concession: releasing any remaining FLOW tokens in its possession allocated for the Ecosystem Reserve to the independent Flow Foundation. This further cemented Dapper’s stated commitment to decentralization. In return, plaintiffs agreed to forfeit any future right to claim that Top Shot Moments are securities.

October 28, 2024 — Final Settlement Approval

The Settlement Fairness Hearing, originally scheduled for September 27, 2024, was rescheduled to October 25, 2024. The court granted final approval on October 28, 2024. A class of approximately 33,037,779 Moments was certified, establishing the eligible universe of claimants. Distributions to class members began proceeding through the claims administrator, Strategic Claims Services, in Media, Pennsylvania. As of early 2026, distributions remain underway.

What the Lawsuit Alleged

The core theory was straightforward. Plaintiffs argued that NBA Top Shot Moments met every prong of the Howey Test and therefore constituted investment contracts — unregistered securities — under federal law.

Here is where it gets specific. The Howey Test, established by the U.S. Supreme Court in SEC v. W.J. Howey Co. (1946), defines an investment contract as: (1) an investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) derived from the efforts of others. Plaintiffs argued all four elements were present.

No one disputed the first prong. Users spent real money buying Moments. The second prong — common enterprise — was satisfied, plaintiffs argued, because capital raised from Moments sales went into developing the Flow blockchain, and all Moments holders shared in the network’s fate. The third prong was supported by Dapper’s own promotional statements. CEO Gharegozlou and the company’s social media promoted Moments as an investment opportunity. The fourth prong was the strongest: because Moments could only be transacted on Dapper’s proprietary marketplace and lived on Dapper’s private blockchain, their value depended entirely on Dapper’s continued operation and management.

Plaintiffs also alleged that Dapper “propped up the market” for Moments while simultaneously preventing users from cashing out for months — a combination that trapped users in a declining asset with no exit.

The Howey Test and What It Means for NFTs

Judge Marrero’s February 2023 ruling represented the first-ever federal court application of the Howey Test to an NFT offering. The ruling’s scope was intentionally narrow. The judge was explicit: this decision applied to the specific facts of NBA Top Shot on the Flow blockchain. It did not declare NFTs as a category to be securities.

The pattern is familiar to securities lawyers. What made Moments different from trading cards — which courts have consistently found are not securities — was the blockchain infrastructure underneath them. A physical basketball card derives value from the market, the player, and collector demand. A Moments NFT derived value from Dapper’s private blockchain. Destroy Dapper, and the Moment ceases to function. That dependency is what courts seized on.

The ruling sent immediate shockwaves across the NFT industry. Issuers rushed to audit their platforms against the Howey framework. The specific vulnerabilities identified by the court — private blockchain control, profit-implying promotional statements, restricted secondary market access — became a compliance checklist for lawyers advising NFT projects.

Who Qualified for the Settlement

The settlement class covered anyone who purchased or acquired NBA Top Shot Moments during the class period: June 15, 2020 to December 27, 2021. If you bought Moments on Dapper’s platform during that window, you were potentially eligible to submit a claim.

The claims deadline was August 30, 2024. Anyone who did not submit a claim by that date and did not exclude themselves from the settlement is bound by it — meaning they permanently forfeited any future right to claim that Top Shot Moments are securities and to pursue separate legal action on those grounds.

Claimants who excluded themselves from the class by August 30, 2024 retained the right to pursue independent claims but received no payment from the settlement fund.

Settlement Payout Details

The total settlement fund was $4 million. From that amount, the court approved attorneys’ fees of up to $1,333,333, litigation expenses of up to $40,000, and named plaintiff contribution awards of up to $20,000. The remainder was distributed pro rata to class members based on their losses during the class period — meaning the amount each buyer paid versus the value of what they received.

The estimated gross recovery was approximately $0.12 per Moment. After fees and expenses, the net recovery dropped to roughly $0.08 per Moment. With approximately 33 million Moments eligible, the individual payouts were small. The structural and business changes Dapper agreed to — decentralizing Flow, opening the secondary market, improving withdrawals — represented the more substantive outcomes for the industry.

Business Changes Dapper Agreed To

The settlement required Dapper Labs to adopt or continue specific business changes that addressed the allegations in the complaint and the court’s February 2023 ruling. Dapper acknowledged the lawsuit was a contributing factor to each of the following:

Relinquishing control of the Flow blockchain as of October 20, 2021, transferring governance to the Flow Foundation. Authorizing four external marketplaces, effective March 17, 2022, to display and sell Moments with full NBA and NBA Players Association licensing rights. Correcting the withdrawal delays that had locked users out of their funds, with processing times returning to 2 to 10 business days around October 2021. And as a specific condition of the June 2024 settlement, transferring all remaining FLOW tokens held by Dapper for Ecosystem Reserve purposes to the Flow Foundation.

Dapper Labs’ Position

Dapper Labs has consistently denied all substantive allegations. The company settled without admitting wrongdoing, fault, liability, or damages. CEO Roham Gharegozlou stated that the settlement “further asserts Dapper Labs’ conviction that NBA Top Shot Moments are not securities under federal law.” He added that, after discovery, both sides agreed that the Flow blockchain is a decentralized public network and that digital collectibles like NBA Top Shot are not securities “in the same way trading cards are not securities.”

Gharegozlou framed the resolution as providing “legal clarity” that frees the company to focus on delivering products to users. He also pushed for broader regulatory action, calling on Congress to pass legislation clarifying that consumer product NFTs like Top Shot are not subject to federal financial regulation.

Regulatory Context: The SEC and NFTs

The Dapper case unfolded alongside the SEC’s first-ever enforcement actions against NFT issuers. In August and September 2023, the agency settled with Impact Theory and Stoner Cats, each of which it accused of selling unregistered securities through NFT offerings. Those settlements established the SEC’s willingness to apply securities law to NFTs under specific factual conditions.

The SEC’s separate investigation into Dapper Labs was closed in September 2023 without enforcement action. The agency did not disclose the scope of its inquiry or its reasons for closing the case. Legal experts cautioned that the closure did not constitute a clearance. For the broader NFT industry, the simultaneous pressures of private class actions and SEC scrutiny in 2023 defined a pivotal regulatory moment — one that the Dapper settlement helped bring to a provisional close. For more on how federal regulators and private plaintiffs have pressured technology companies, see our analysis of the Google Android cellular data lawsuit and the Cash App class action settlement.

Industry Implications

The Dapper settlement is closed law, but its implications remain open questions. Judge Marrero’s 2023 ruling established that NFTs can meet the Howey Test under specific factual conditions. That precedent does not disappear with the settlement. Future plaintiffs in similar NFT cases can cite the ruling. Regulators can invoke it.

What the settlement resolved was narrower: Dapper Labs’ specific liability under this class action, for this class period, under these facts. Plaintiffs agreed never to again argue that Top Shot Moments are securities. But the legal standard the court articulated remains in place. And the industry characteristics that triggered it — private blockchains, profit-implying promotions, restricted secondary markets — still describe how some NFT platforms operate today.

The case also highlighted the structural vulnerabilities that arise when a company builds both the product and the infrastructure that supports it. Vertical integration is efficient. It is also legally dangerous when regulators and plaintiffs can argue that investors’ returns depend entirely on the issuing company’s continued existence. That argument is only more powerful in markets where the underlying asset can lose all value overnight — as millions of Top Shot users discovered when the NFT market collapsed in 2022. Cases like the Roblox child exploitation class action reveal the same pattern: platforms that control the entire user experience bear heightened legal exposure when that experience harms users.

What This Lawsuit Teaches Consumers

The Dapper Labs case is a clean lesson in the gap between a product’s marketing and its legal reality. NBA Top Shot was sold as a digital trading card — fun, collectible, sports-branded. What it actually was, under the court’s analysis, was a financial instrument on a private network controlled by one company. The marketing emphasized the joy of owning a LeBron James dunk. The legal reality was closer to buying a share in a private venture.

For consumers, this means understanding what infrastructure your digital asset actually lives on. A physical basketball card exists regardless of whether its publisher goes bankrupt. An NFT on a private blockchain ceases to function if the company behind that blockchain folds or changes course. That dependency is financial risk. It should be evaluated accordingly.

No warning label. No securities registration. No regulatory approval. That is what plaintiffs argued — and what a federal judge found plausible enough to send to trial. The settlement avoided that trial, but the underlying question remains unsettled: when does a digital collectible become an investment contract? The answer, as Judge Marrero made clear, is not about what you call the product. It is about how the product actually works, who controls the infrastructure that supports it, and what the company told buyers to expect. Every NFT buyer and issuer should understand that distinction before the next market cycle begins.