Legal Battle Over DraftKings NFTs
A U.S. Judge in Massachusetts has denied DraftKings’ motion to dismiss a class action lawsuit filed by buyers of its non-fungible tokens (NFTs). The lawsuit claims that these tokens should be considered investment contracts, potentially leading to a legal determination on whether NFTs can be classified as securities.
DraftKings, a popular sports betting and daily fantasy sports company, offers sports-themed NFTs on its marketplace, which operates on the Polygon blockchain. The lawsuit, initiated by a buyer named Justin Dufoe in March 2023, alleges that DraftKings’ NFTs satisfy the criteria set by the Howey test, a legal standard used to determine if an asset qualifies as a security.
In a recent ruling, the court agreed with the plaintiffs that DraftKings’ NFTs involve an investment of money, pooling of assets into a common enterprise with shared risks and profits, and create a reasonable expectation of profit based on DraftKings’ efforts. These factors potentially classify the NFTs as securities under the Howey test.
The court found that the value of DraftKings’ NFTs was tied to the success of the DraftKings Marketplace, indicating a direct correlation between the tokens’ values and the marketplace’s performance. This linkage between the NFTs and DraftKings’ business activities has been a focal point in previous cases involving NFTs.
Dapper Labs Case Comparison
Notably, Dapper Labs, a company known for creating NFTs on its proprietary blockchain called Flow, faced a similar class action lawsuit. In June, Dapper Labs agreed to a $4 million settlement in a case that raised concerns about the company’s NFTs potentially being classified as securities. The Securities and Exchange Commission (SEC) had previously investigated Dapper Labs but closed the case in September 2023.
One key difference between Dapper Labs’ NFTs and those issued by DraftKings is the blockchain technology used. Dapper Labs operates on its private Flow blockchain, while DraftKings utilizes the Polygon blockchain. The court determined that Dapper Labs’ use of a private chain like Flow increased the risk of violating securities laws due to the dependency on Dapper’s managerial efforts and the expectation of profit, meeting the Howey test’s criteria.
As the legal proceedings continue, the outcome of the DraftKings class action lawsuit remains uncertain. The court’s decision to allow the case to proceed sets the stage for a potentially significant legal precedent regarding the classification of NFTs as securities in the evolving digital asset landscape.