Judge Denies DraftKings' Request to Dismiss Class Action Lawsuit Over Alleged Unregistered NFT Securities

A U.S. judge has rejected DraftKings' motion to dismiss a lawsuit alleging securities law violations with its NFT offerings. The plaintiff claims DraftKings sold unregistered investment contracts through its NFTs, violating federal securities laws. The court found that the plaintiff's allegations of a common enterprise and expectations of profit met the Howey Test for securities classification. The case proceeds, with DraftKings denying wrongdoing.

The world of sports and non-fungible tokens (NFTs) collided in a Massachusetts courtroom recently, as a judge denied DraftKings' motion to dismiss a class action lawsuit alleging that the company violated federal securities laws with its NFT offerings [1]. This development marks a significant step forward in the ongoing debate surrounding the classification of NFTs as securities.

At the heart of the lawsuit are DraftKings' sports-themed NFTs, which are offered on the company's marketplace via the Polygon blockchain. Plaintiff Justin Dufoe, along with other NFT owners, accused DraftKings of selling unregistered investment contracts through its NFTs. According to the court, the plaintiff's allegations of a common enterprise and expectations of profit were sufficient to meet the Howey Test for securities classification [1].

The Howey Test, established by the U.S. Supreme Court in 1946, is a three-part test used to determine whether a transaction involves the sale of a security. The test requires that the investment involve an investment of money, the investment of funds be pooled into a common enterprise, and the investment create a reasonable expectation of profits [2]. In this case, the court found that the NFTs' values were dependent on the success of the DraftKings Marketplace, and that the value of these tokens moved in tandem with interest in that specific marketplace [1].

The implications of this decision extend beyond DraftKings. In June 2023, Dapper Labs, another prominent NFT company, agreed to pay $4 million to settle a similar class action suit [1]. The SEC reportedly launched an investigation into Dapper Labs but closed it in September 2023 [1]. The distinction between Dapper Labs' NFTs, which are issued on the company's proprietary blockchain called Flow, and those offered by DraftKings, which are issued on the Polygon blockchain, may play a role in future court battles over NFTs as securities.

As the debate surrounding NFTs as securities continues to unfold, this case serves as a reminder of the importance of complying with securities laws. DraftKings has denied any wrongdoing and the date for the continuation of the class action suit has not yet been set [1].

References:
[1] Casper, Denise J. DraftKings Must Face Securities Suit Over NFTs, Judge Rules. Law360. June 14, 2023. https://www.law360.com/classaction/articles/1854715/draftkings-must-face-securities-suit-over-nfts
[2] Howey Test. Investopedia. https://www.investopedia.com/terms/h/howey-test.asp