NFTs
DraftKings NFTs Trial: Lawsuit Moves Forward
A U.S. judge has rejected DraftKings’ motion to dismiss a class action lawsuit filed by buyers of the company’s non-fungible tokens (NFTs). The lawsuit accuses DraftKings, its CEO, CFO and president of allegedly violating federal securities laws with its NFTs.
DraftKings Accused of Selling Unregistered Securities
In March 2023, Justin Dufoe filed a putative class action lawsuit against sports betting and fantasy sports company DraftKings. In the complaint, Plaintiff claims that the company’s non-fungible tokens should be considered “investment contracts” under the Howey Test.
Draft Kings released the ‘DraftKings Marketplace’ in 2021 using the Polygon Blockchain. The marketplace offered “digital collectibles across sports, entertainment, and culture.” Its first NFT featured American football player Tom Brady and sold for $12 to $1,500 each.
Justin Dufoe's lawsuit against DraftMakers. Source: CourtListener
Dufoe claims that the sports betting company’s NFTs are a security under federal law. Additionally, the complaint alleges that the defendants knowingly sold unregistered securities and profited from their sales:
Defendants had actual knowledge of facts indicating that the NFTs they promoted and sold were “securities” under federal and state securities laws and, further, that they failed to register their NFTs as securities. Defendants have reaped, or will reap, hundreds of millions of dollars in profits from their sales of unregistered securities.
In October, DraftKings filed a motion to dismiss the lawsuitarguing that their NFTs are not securities “and therefore are not subject to the registration requirements of the Securities Act of 1933 or the Securities and Exchange Act of 1934.”
US judge rejects motion to dismiss securities NFT trial
On July 2, the U.S. District Court of Massachusetts denied the motion, as the plaintiff “plausibly alleges that the DraftKings NFTs are investment contracts and therefore securities under the Howey test.”
Us Judge rejects DraftKings' motion to dismiss the lawsuit. Source: CourtListener
The Court’s brief states that Justice Denise J. Casper would not debate whether NFTs involved the “investment of money.” Instead, the Court focused on the remaining elements of the Howey test:
That is, whether Dufoe and other buyers were investing in a common enterprise with the expectation of profits derived solely from the efforts of others.
The author has sufficiently alleged the requirement of pooling of assets, where the pooling of assets of several investors is done “in such a way that they all share the profits and risks of the venture.”
According to the document, “revenue generated from the sale of NFTs was reinvested in DraftKings’ business, including through the promotion of the Marketplace.” This satisfied the “horizontal commonality” quality of the common venture requirement.
Dufoe also plausibly claimed a reasonable expectation of profits from purchasing DraftKings NFTs. As explained by attorney Rob Freund, expectation was “based on capital appreciation driven by DraftKings’ efforts to maintain investor interest and demand in the Marketplace.”
The company’s promotional activities and marketing campaign encouraged customers to view digital collectibles as “investments whose value could appreciate.”
Finally, Plaintiff plausibly claimed that the expected profits would come from significant efforts by others, rather than investors. As such, the price of the NFTs depended on the company’s efforts and promotion.
The Court ultimately found that “the primary forces behind the market price of NFTs are a factual issue that is not suitable for resolution in a motion to dismiss.” As a result, the upcoming legal battle could have additional implications for the legal status of NFTs and the industry.
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