In June 2024, Dapper Labs agreed to a $4 million settlement to resolve a class action lawsuit that alleged NBA Top Shot Moments—digital collectibles created by the company—were unregistered securities. The lawsuit, which began in May 2021 with investors led by Jeeun Friel, challenged whether the NFTs should have been regulated like traditional investment products. While Dapper Labs did not admit wrongdoing, the settlement included a significant concession: plaintiffs agreed to stop claiming that NBA Top Shot Moments constitute securities under federal law. This outcome suggests that digital collectibles may operate in a gray area of securities regulation, even as legal questions about NFTs remain unresolved.
The core dispute centered on whether NBA Top Shot Moments met the criteria for securities under the Howey Test, a legal standard that has governed investment contracts for decades. Plaintiffs argued that these NFTs—digital representations of notable NBA gameplay moments—functioned like investment contracts because their value increased with the platform’s popularity and buyers expected profits from Dapper Labs’ efforts to market and maintain the platform. The company had also imposed trading restrictions, blocking investors from freely selling their Moments on open markets and forcing transactions through Dapper Labs’ proprietary marketplace. For buyers who saw their collections decline in value after the initial hype, the settlement offers partial compensation for what many viewed as a failed investment.
Table of Contents
- How Did the Howey Test Apply to NBA Top Shot Moments?
- What Did the Settlement Terms Reveal About NFT Regulation?
- What Were the Trading Restrictions That Concerned Investors?
- What Should NFT Investors Know About Securities Classification?
- What Does the Howey Test Miss About Modern Digital Assets?
- How Did NBA Top Shot’s Market Collapse Affect Investors?
- What Does This Case Mean for the Future of NFTs?
- Conclusion
How Did the Howey Test Apply to NBA Top Shot Moments?
The Howey Test, established in a 1946 Supreme Court case, defines a security as an investment contract involving money invested in a common enterprise with expectations of profit derived from the efforts of others. Plaintiffs in the Dapper Labs case argued that NBA Top Shot Moments fit all four prongs. When collectors purchased these NFTs, they spent money on digital assets they hoped would appreciate in value. The “common enterprise” was Dapper Labs’ Flow blockchain platform and its NBA partnership. The expectation of profit came from the company’s marketing efforts, league partnerships, and platform development. And the profits would come from Dapper Labs’ work, not from the collectors’ own efforts.
Dapper Labs countered that NBA Top Shot Moments were collectibles—more akin to trading cards or art—rather than investment contracts. The company argued that collectors were purchasing digital art with entertainment value, similar to how someone might buy a physical NBA card. This distinction matters enormously in securities regulation. If an item is purely a collectible, it faces minimal federal oversight. If it’s a security, it must be registered with the Securities and Exchange Commission, and its sale is subject to strict rules. The settlement’s requirement that plaintiffs stop asserting the NFTs are securities represents a practical victory for this interpretation, though it doesn’t constitute a final legal ruling.
What Did the Settlement Terms Reveal About NFT Regulation?
The $4 million settlement came without Dapper Labs admitting liability or wrongdoing—a common settlement structure that allows companies to resolve disputes while preserving their legal positions. However, the agreement’s most telling element was the stipulation that plaintiffs would cease claiming NBA Top Shot Moments are securities. This isn’t a ruling that the nfts are definitely not securities, but rather an agreement to stop litigating the question. For Dapper Labs, this was valuable. For investors who bought Moments at peak prices and watched their portfolios collapse as interest in NBA Top Shot plummeted in 2022 and 2023, the settlement provided some financial recovery but left the fundamental legal question unresolved.
One significant limitation of the settlement is that it offers no clear guidance for the broader NFT industry. Other companies creating digital collectibles don’t know whether they face similar legal exposure. Different courts might reach different conclusions about whether other NFTs qualify as securities. The settlement also did not address the trading restrictions that were central to plaintiffs’ allegations—that Dapper Labs blocked investors from selling their Moments on platforms outside of its control. These restrictions meant that even if collectors wanted to liquidate their holdings quickly, they were confined to the official marketplace, where secondary market activity had dried up by 2022.
What Were the Trading Restrictions That Concerned Investors?
Dapper Labs required all secondary market transactions for NBA Top Shot Moments to occur on its proprietary platform, Flow Blockchain. This was a significant departure from how traditional collectibles markets operate. Baseball cards and art can be sold at auctions, on peer-to-peer marketplaces, or through specialized dealers. But NBA Top Shot Moments existed only within Dapper Labs’ controlled ecosystem. When the secondary market for Top Shot began to collapse in 2022, collectors discovered they were trapped in an illiquid market.
Some Moments that once sold for thousands of dollars in early 2021 dropped to pennies or couldn’t find buyers at any price. The restricted trading became especially problematic because Dapper Labs also controlled pricing information and platform operations. If the company decided to make Top Shot Moments less accessible, change the economics of minting new Moments, or reduce its marketing efforts, collectors had no alternative market to turn to. For plaintiffs in the lawsuit, these restrictions supported their argument that NBA Top Shot Moments functioned like securities—they represented an investment where token holders were passive beneficiaries of Dapper Labs’ platform management, unable to independently determine their asset’s value through open market trading. The settlement did not require Dapper Labs to change these platform policies, meaning future collectors would face the same restrictions.
What Should NFT Investors Know About Securities Classification?
The Dapper Labs case illustrates a critical risk for anyone considering investing in digital assets: regulatory classification matters more than the technology. A single determination that an NFT is a security can invalidate your investment, expose you to trading restrictions, and create tax complications. Conversely, if an NFT is classified as a non-security collectible, you have fewer legal protections as a consumer. Investors in NBA Top Shot learned this painfully when the market collapsed and they discovered that neither the SEC’s consumer protection rules nor state securities laws clearly covered their situation. When evaluating whether to purchase NFTs being promoted as investment opportunities, distinguish between projects that openly acknowledge investment risk and those that suggest NFTs are simply digital art with entertainment value.
Projects that emphasize passive income, staking rewards, or appreciation potential are more likely to face securities scrutiny. Projects marketed purely as collectibles—art that you own because you appreciate it, similar to how someone collects prints or vintage cards—are less likely to be deemed securities. However, this distinction isn’t absolute. The Howey Test can be applied to any asset, regardless of how it’s marketed. The Dapper Labs settlement shows that even a company explicitly saying “these are not securities” faced a lawsuit based on how the NFTs actually functioned.
What Does the Howey Test Miss About Modern Digital Assets?
The Howey Test, designed in 1946 for agricultural investment schemes, doesn’t account for several characteristics of NFTs and blockchain-based assets. The test assumes a traditional management structure where profits depend on a single issuer’s efforts. But NFTs can exist on decentralized platforms where no single entity controls outcomes. Some NFT projects genuinely operate as decentralized autonomous organizations where token holders collectively govern decisions. Others involve communities rather than centralized companies. Applying a 1946 legal standard to 2020s technology creates regulatory uncertainty that benefits no one—not investors, not legitimate projects, and not regulators.
A significant limitation of the settlement is that it doesn’t clarify how the Howey Test should be applied when an NFT’s value depends partly on platform developments and partly on secondary market trading. NBA Top Shot Moments derive value from NBA licensing and the Flow platform’s success, but also from scarcity and collector demand. Which factor is decisive? The settlement doesn’t say. This ambiguity creates risks for both investors and creators. An investor might lose money on an NFT that later gets classified as a security; a creator might unknowingly issue an unregistered security and face SEC enforcement. The broader crypto and NFT industry continues to push for clearer regulations rather than case-by-case litigation, but the Dapper Labs settlement didn’t accelerate that process.
How Did NBA Top Shot’s Market Collapse Affect Investors?
NBA Top Shot Moments peaked in value during the early 2021 NFT bull market. Some rare Moments—like LeBron James highlight clips issued in limited quantities—sold for hundreds of thousands of dollars. Collectors who bought at peak prices and held expecting continued appreciation watched the market evaporate. By mid-2022, the secondary market was dormant. A Moment that sold for $100,000 in February 2021 might receive no bids at $1,000 a year later. The collapse reflected multiple factors: the overall NFT market crash, declining interest in NBA Top Shot specifically, and the realization among collectors that the product offered little utility beyond speculation.
The $4 million settlement distributed among class members meant that some investors recovered 10-20 cents on the dollar for their losses, but many who had invested thousands received minimal compensation. The settlement was negotiated without requiring Dapper Labs to implement market-stabilizing measures or redemption options for token holders. The company retained the right to continue operating NBA Top Shot largely unchanged. For investors who received settlement payments, there was no guarantee of going-forward market liquidity. The case served as a cautionary tale about investing in NFTs controlled by a single company. If Dapper Labs had built NBA Top Shot as a true decentralized platform where no single entity could restrict trading or control platform development, the securities question might not have arisen—but it also might not have functioned as smoothly. The tradeoff between centralized control (which creates securities risk) and decentralization (which reduces company liability but increases technical complexity) remains unresolved.
What Does This Case Mean for the Future of NFTs?
The Dapper Labs settlement marked a turning point in how courts and regulators view digital collectibles. It signaled that companies can’t issue NFTs without considering whether they function like investment contracts under existing securities law. However, it also showed that settlement is possible and that the legal question can be resolved outside of courts through negotiation. Several implications follow. First, legitimate NFT projects should have clear documentation explaining why their assets don’t meet the Howey Test criteria. Second, platforms issuing NFTs should consider allowing open secondary market trading rather than restricting transactions to proprietary marketplaces.
Third, regulatory clarity remains essential—companies and investors both benefit from explicit guidance rather than relying on litigation outcomes. Looking forward, the NFT market faces continued regulatory pressure, but the Dapper Labs settlement doesn’t necessarily indicate that all NFTs will be classified as securities. Projects that genuinely function as collectibles with utility beyond investment appreciation likely remain outside securities regulation. Projects that explicitly promise returns, rewards, or passive income remain at higher risk. The SEC has pursued enforcement actions against other crypto and NFT companies, but hasn’t issued comprehensive guidance on NFT classification. Until that guidance arrives, the Howey Test remains the primary tool courts use to evaluate digital assets, and companies must structure their offerings with that standard in mind. The next major legal clarity may come from regulatory agencies finalizing rules on digital assets, or from a Supreme Court case that revisits the Howey Test in a modern context.
Conclusion
The Dapper Labs NFT class action settlement demonstrates that digital collectibles marketed with investment appeal face serious securities law risks. Plaintiffs successfully argued that NBA Top Shot Moments functioned like investment contracts because their value depended on Dapper Labs’ platform efforts and because the company restricted independent trading. The June 2024 settlement required Dapper Labs to pay $4 million while plaintiffs agreed to cease claiming the NFTs are securities—a pragmatic resolution that leaves the broader legal question unanswered. For investors, the case illustrates the importance of understanding whether you’re purchasing entertainment assets or investment products, and the risks of investing in digital collectibles controlled by a single company.
If you purchased NBA Top Shot Moments during the class period (May 2021 through the settlement date), you may be eligible to file a claim to recover a portion of your losses. Claims typically require documentation of your purchase and sale records, or proof of holdings. The settlement administrator will provide specific filing instructions, including deadline information. Even if you didn’t actively trade your Moments but held them and watched their value decline, you remain eligible as a class member. As the NFT market matures and regulatory frameworks clarify, future digital collectibles will likely be structured with these legal lessons in mind, but investors must continue to evaluate whether they’re buying art or investment contracts.
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