Dapper Labs, one of the premier non-fungible token companies, whose products include NBA Top Shot and CryptoKitties, was under investigation by the Securities and Exchange Commission until September, according to an internal agency document obtained by Fortune.
In what the SEC calls a “Case Closing Report,” David Hirsch, the regulator’s crypto and cyber unit chief, terminated an investigation titled “Dapper Labs, Inc.” on Sept. 29. The one-page report did not include why the agency was investigating Dapper Labs, when the investigation began, or why the SEC decided to close it.
The agency did not release to Fortune a five-page set of recommendations associated with the report. “The SEC does not comment on the existence or nonexistence of a possible investigation,” said a spokesperson.
The regulator’s decision in late September to close its investigation into Dapper Labs, which has raised over $600 million since its first funding round in 2018, according to Crunchbase, follows SEC settlements first with Impact Theory in August and then Stoner Cats in mid-September. In what were the SEC’s first-ever salvos against the NFT industry, the agency argued that both NFT projects offered and sold unregistered securities and therefore violated federal law.
Separately, Dapper Labs is fighting an ongoing class-action lawsuit in which plaintiffs allege that NBA Top Shot Moments, NFTs sold by Dapper Labs, are unregistered securities. In February 2023, the federal judge presiding over the case declined to dismiss the suit, writing that it is “facially plausible” that Moments are securities.
“We were never contacted by the SEC and as a result were unaware of this investigation,” said a Dapper Labs spokesperson. “Irregardless, it appears that the SEC closed its case.”
From CryptoKitties to layoffs
In late 2017, Dapper Labs, led by cofounder and CEO Roham Gharegozlou, created CryptoKitties, a blockchain-based game where players create and trade NFTs of cartoon cats. The “oh-so-adorable” creatures helped inspire the NFT craze and landed the startup blue-chip investors, including Andreessen Horowitz, Union Square Ventures, Google Ventures, among others.
Dapper Labs followed up the success of CryptoKitties with Top Shot, an NBA-endorsed marketplace where users can buy, as NFTs, video highlights from their favorite basketball players. The concept, akin to a digital version of a trading card game, was soon a success, and monthly sales ballooned to more than $226 million in February 2021, according to data from CryptoSlam.
Vacuuming up more and more venture capital, including investments from NBA players themselves, Dapper Labs soon struck deals with the NFL and LaLiga to create similar products. But in 2022, the market collapsed, as total NFT sales volume dropped from an all-time high of more than $6 billion in January 2022 to a low of a little less than $300 million in September 2023, per CryptoSlam. Top Shot volumes similarly plummeted to a low of a little more than $2 million in monthly sales volume that same month.
Dapper Labs soon conducted layoff after layoff, and its most recent public cut came in July 2023. Since then, the number of employees at the company and the Flow Foundation, the entity that supports the blockchain behind Dapper Labs’s NFT projects, has shrunk from about 200 to slightly fewer than 180, according to a spokesperson.
SEC v. NFT
Following the collapse of crypto exchange FTX, the SEC has steadily sued and investigated a suite of crypto companies, including TRON Foundation, Terraform Labs, Binance, Coinbase, Kraken, and now Uniswap. And settlements with Impact Theory and Stoner Cats in the second half of 2023 imply that the regulator has begun to seriously scrutinize the NFT industry.
The agency’s decision to close its investigation into Dapper Labs, one of the most funded companies in the market, may indicate a course correction. “It will surely provide some kind of comfort to participants in the NFT market,” Philip Moustakis, a securities lawyer at Seward & Kissel, told Fortune.
He added, though, that “you can’t presume that all NFTs are safe. The SEC has already made the point that some transactions in NFTs could constitute securities transactions.”
Arthur Jakoby, a former SEC prosecutor who now specializes in securities litigation at Herrick Feinstein LLP, cautioned against reading too much into the agency’s closure of its investigation. “It doesn’t mean they’re not going to investigate them next year,” he said. “It doesn’t mean that they think Dapper Labs hasn’t done something wrong. It doesn’t mean that they cleared Dapper Labs.”
It also doesn’t mean the end of securities-related litigation for the onetime NFT giant. The class-action lawsuit against Dapper Labs, in which plaintiffs allege that NBA Top Shot Moments are unregistered securities, continues to wind its way through federal court. The judge presiding over the case ordered both parties to complete depositions by June 17.
