NFTs
DraftKings faces NFT lawsuit as judge rules Howey test is valid
Published on: July 3, 2024, 05:22h.
Last updated: July 3, 2024, 05:22h.
DraftKings (NASDAQ: DKNG) is set to face class-action litigation after a federal judge ruled that non-fungible tokens (NFTs) offered on the company’s DraftKings Marketplace are considered securities.
On Tuesday, U.S. District Judge Denise Casper ruled that the lawsuit can proceed because the Howey Test bar has been met with respect to digital cards sold on the Marketplace to participants in DraftKings’ Reignmakers fantasy games.
The Howey Test is derived from the landmark 1946 Supreme Court case SEC v. W.J. Howey Co. Since then, the high court has established four criteria for determining whether an asset is a security. These criteria are investment of money, expectation of profits, common enterprise, and success of the investment dependent on parties other than the individual investor. Casper ruled that the plaintiffs met these thresholds in their complaint against DraftKings.
So while the Howey test remains crucial in discerning the line between securities and non-investments, its application has varied based on jurisdiction, case specifics, and changes in the types of financial products offered,” according to Investopedia.
An NFT is a unit of data stored on the blockchain. NFTs can be applied to various digitized items, such as audio and video files and images. the process was opened in March 2023 The lawsuit in U.S. District Court in Boston was filed by Illinois resident Justin Dufoe. He claims he lost approximately $14,000 worth of NFTs he purchased on the DraftKings Marketplace.
Bad timing for DraftKings NFT efforts
In mid-2021, with the NFT market booming, DraftKings revealed Plans for DraftKings Marketplace. Reignmakers, what functions on the Polygon blockchainwas the addition of fantasy sports to the Marketplace.
Through Reignmakers, users build up collections of gamified NFT cards through auctions, pack drops, and secondary market transactions. Participants then use these cards in NFL, PGA Tour, and UFC fantasy competitions during those seasons. However, the timing proved unfavorable for Reignmakers participants hoping to cash in on their digital cards because soon afterward, NFT prices plummeted and volumes dried up. Dufoe’s attorney noted in the 2023 legal complaint that his client purchased more than $72,000 worth of NFTs on the DraftKings Marketplace and that the value of those tokens had fallen to $58,000.
The lawsuit also alleges that during the Class Period, DraftKings failed to register its NFTs as securities with the Securities and Exchange Commission (SEC). If proven, DraftKings could attract regulatory scrutiny because the SEC has taken enforcement actions in which it classifies NFTs as securities.
Casper’s ruling indicates that DraftKings Marketplace is much more than a digital equivalent of a trading card store. Instead, the judge said it is a securities exchange, which could imply that DraftKings is allegedly trading securities in an unauthorized manner.
Recent precedent does not favor DraftKings
While NFTs are a young asset classThere is already some legal precedent that may favor the plaintiffs in the DraftKings Marketplace case.
In 2023, U.S. District Judge Victor Marrero ruled that NBA trading cards offered by NBA Top Shot — which is controlled by Dapper Labs — were securities. Dapper has made a total of $153 million from the sales and resales of these NFTs on its platform, and last month, the U.S. District Court for the Southern District of New York ordered the company to pay plaintiffs $4 million. The plaintiffs sued Dapper, claiming that NBA Top Shot NFTs are securities.
Additionally, in 2023, the SEC received a total of $1.5 million in fines from two NFT issuers that the commission said were selling unregistered securities.