The Dapper Labs NFT Lawsuit Explained: Are NFTs Securities Under U.S. Law?

Introduction

As NFTs moved from niche digital collectibles into billion-dollar markets, legal scrutiny inevitably followed. One of the most influential cases at the intersection of NFTs, blockchain infrastructure, and U.S. securities law is Friel v. Dapper Labs, Inc., commonly referred to as the Dapper Development lawsuit.

This case does not merely concern one NFT platform. Instead, it raises a foundational question for the entire Web3 industry:

Can NFTs be classified as securities under U.S. law?

The outcome—and even the reasoning applied along the way—has significant implications for NFT issuers, marketplaces, investors, and regulators worldwide.

I. Case Background and Origin of the Dispute

• Case Name: Friel v. Dapper Labs, Inc.

• Court: U.S. District Court for the Southern District of New York (SDNY)

• Filed: May 2021 (as a proposed class action)

Dapper Labs, a blockchain company founded in 2018, launched NBA Top Shot in 2020. The platform allows users to buy, sell, and trade officially licensed NBA highlight clips as NFTs, known as “Moments.” These NFTs operate on Flow, a blockchain developed and maintained by Dapper Labs.

NBA Top Shot quickly became one of the largest NFT marketplaces in the world. However, a group of purchasers alleged that these NFTs were not merely digital collectibles, but rather unregistered investment contracts, sold in violation of U.S. securities laws.

II. The Central Legal Question: Are NFTs Securities?

The lawsuit does not challenge the technology itself. Instead, it focuses on the legal classification of the NFTs being sold.

The Howey Test: The Governing Legal Standard

Under U.S. law, one category of “security” is an investment contract, defined by the Supreme Court in SEC v. W.J. Howey Co. The Howey Test asks whether a transaction involves:

1. An investment of money

2. In a common enterprise

3. With a reasonable expectation of profits

4. Derived primarily from the efforts of others

If all four elements are satisfied, the asset may be regulated as a security—regardless of whether it is labeled as an NFT, token, or collectible.

III. Court Proceedings and Key Judicial Decisions

1. Motion to Dismiss Denied (February 22, 2023)

In a pivotal early ruling, Judge Victor Marrero denied Dapper Labs’ motion to dismiss the case.

Importantly, the court did not rule that the NFTs were securities. Instead, it held that the plaintiffs had plausibly alleged facts sufficient to satisfy the Howey Test at the pleading stage, allowing the lawsuit to proceed.

Key judicial observations included:

• The decision was fact-specific, not a blanket ruling on all NFTs

• The ruling occurred at an early procedural stage

• The court emphasized that not all NFTs are securities by default

Why the Court Allowed the Claims to Proceed

The court highlighted several structural features of NBA Top Shot:

• Marketplace Control: Moments could only be traded on Dapper-controlled platforms

• Blockchain Dependency: Flow blockchain was created and governed by Dapper Labs

• Value Linkage: The value of the NFTs appeared tied to Dapper’s ongoing efforts

• Marketing & Promotion: Promotional language may have encouraged profit expectations

These factors, taken together, were sufficient to plausibly meet each element of the Howey Test.

IV. Settlement Reached in 2024

In 2024, Dapper Labs and the plaintiffs reached a settlement of approximately $4 million USD.

Key points of the settlement:

• Dapper Labs did not admit wrongdoing

• Plaintiffs agreed to limit future claims asserting these NFTs were securities

• Dapper committed to further decentralization and compliance efforts for Flow

⚠️ Crucially, this settlement was a commercial resolution, not a judicial ruling declaring NBA Top Shot NFTs to be securities.

V. How the Court Applied the Howey Test

The court emphasized that issuer control and market dependency were decisive factors. An NFT operating independently on an open market could be treated very differently.

VI. Related NFT Securities Cases

DraftKings NFT Litigation (Dufoe v. DraftKings, Inc.)

In a similar case, a court also rejected a motion to dismiss securities claims related to NFTs, reinforcing the idea that market control and issuer involvement can establish a “common enterprise.”

Other Regulatory Actions

• SEC v. Impact Theory (NFT enforcement action)

• Stoner Cats NFT investigation

• OpenSea Wells Notice (ongoing regulatory scrutiny)

Together, these cases suggest a consistent enforcement theme: economic reality over technical labels.

VII. The SEC’s Position on NFTs

The U.S. Securities and Exchange Commission has not issued comprehensive NFT-specific regulations. However:

• The SEC continues to rely on the Howey Test

• Certain NFT offerings have been targeted through enforcement actions

• Some SEC commissioners have publicly expressed concern about overregulating digital art and collectibles

The regulatory environment remains uncertain and evolving.

VIII. Industry Impact and Compliance Takeaways

For NFT Issuers

Projects must carefully distinguish between consumer NFTs and investment-oriented products.

Higher legal risk factors include:

• Centralized control over marketplaces

• Restrictions on secondary trading

• Marketing that emphasizes profit potential

• Technical dependence on issuer-managed infrastructure

Practical Compliance Strategies

• Enable multi-marketplace trading

• Avoid profit-oriented promotional language

• Clearly define NFTs as collectibles or utility assets

• Disclose regulatory risks transparently

• Obtain jurisdiction-specific legal advice

These measures do not eliminate risk—but they significantly reduce it.

Conclusion: A Defining Moment for NFTs and Securities Law

The Dapper Labs lawsuit represents a landmark moment where traditional securities law confronted modern digital assets.

While the case did not conclusively define NFTs as securities, it clarified how courts analyze them—focusing on control, dependency, and economic expectations rather than labels or technology.

For the Web3 industry, the message is clear:

Innovation must evolve alongside legal and regulatory awareness.

As NFT markets mature, compliance-aware design may prove just as critical as creativity and community.