DraftKings groundbreaking lawsuit – are NFTs securities?

Lea Hogg July 3, 2024

SiGMA news

DraftKings groundbreaking lawsuit – are NFTs securities?

A U.S. judge in Massachusetts has rejected DraftKings’ attempt to dismiss a class action lawsuit. The lawsuit, initiated by buyers of its non-fungible tokens (NFTs), argues that these tokens are, in fact, investment contracts. This pivotal ruling paves the way for a future court trial that will scrutinize the classification of NFTs as securities.

DraftKings, a prominent player in the digital marketplace, offers sports-themed NFTs via the Polygon blockchain. The lawsuit was first filed by Justin Dufoe, an NFT buyer, on behalf of other owners in March 2023. Dufoe’s contention is that these NFTs satisfy the criteria of the Howey test, a test created by the Supreme Court to determine whether certain transactions qualify as investment contracts.

In the recent ruling, the court concurred that DraftKings’ NFTs involved an investment of money, pooled assets into a common enterprise with shared risks and profits, and created a reasonable expectation of profit from DraftKings’ efforts. As such, they could plausibly be classified as securities under the Howey test.

The court further noted that the value of the NFTs was dependent on the success of the DraftKings Marketplace. This observation aligns with findings from previous cases examining NFTs, where the value was found to move in tandem with interest in the specific marketplace.

A comparative analysis: Dapper Labs

Interestingly, this case follows a similar lawsuit faced by Dapper Labs. In June, Dapper Labs agreed to pay $4 million to settle a class action suit. The SEC had previously launched an investigation into Dapper Labs but closed it in September 2023.

A key difference between the NFTs offered by Dapper Labs and DraftKings is the blockchain they use. Dapper Labs uses its proprietary blockchain called Flow, while DraftKings issues its tokens on Polygon. The court determined that the use of Flow, a private chain, meant Dapper Labs ran a higher risk of violating securities laws. This is because its Flow blockchain created a dependency on Dapper’s managerial efforts and success, satisfying the Howey test criteria of a common enterprise and expectation of profit.

As of now, a date to continue the DraftKings class action suit has not been set. This case represents a significant step in the ongoing debate about the classification of NFTs as securities, and its outcome could have far-reaching implications for the future of digital assets.

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