NFTs
DraftKings to face lawsuit claiming its NFTs are securities (1)
DraftKings Inc. and its leaders failed to convince a federal court to dismiss a proposed class-action lawsuit alleging it violated federal securities laws by failing to properly register its nonfungible tokens.
Plaintiff Justin Dufoe bought and sold NFTs on the DraftKings Marketplace from February 2022 to February 2023. In his original complaint, Dufoe said he and others in his proposed class expected to profit from the NFTs, but he sold some at a loss and many he still had were worthless. Dufoe alleged DraftKings violated securities laws when it sold the NFTs and should return the money to the buyers. DraftKings said the NFTs were not securities
Dufoe sufficiently alleged that DraftKings’ NFTs were investment contracts and therefore securities within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, Judge Denise L. Casper said Tuesday for the U.S. District Court for the District of Massachusetts.
An NFT is a “digital asset whose ownership, including purchase and sale history, is reflected on a blockchain,” Casper said. DraftKings’ NFTs “feature a static or dynamic image of a professional athlete,” she said.
DraftKings NFTs can be bought and sold on the DraftKings Marketplace, but they can be sold on different platforms, Casper said. But DraftKings retains discretion to determine which other platforms can be used and is entitled to royalties when an outside platform is used, she said.
DraftKings’ first NFTs, released in August 2021, featured Tom Brady and sold for $12 to $1,500 each, Casper said. But in February 2022, DraftKings began offering “gamified” NFTs, she said. These NFTs depicted current NFL players in tiers of rarity based on star status, but there was no guarantee of which tier stars would be included in a given pack, she said. DraftKings promoted them as good investments and opened a chat room where the gamified NFTs were traded like stocks, she said.
While DraftKings said the NFTs were not securities, a security is an “investment contract” where a person invests their money in a common venture and is led to expect profits from the promoter, Casper said.
DraftKings did not discuss whether the NFTs were an investment of money, Casper said. A pooled venture is where multiple investors pool assets in a way that everyone shares the profits and risks of the venture, she said. Pooling occurs when the funds received by the promoter are essentially reinvested by the promoter into the business, which increases the value of the instrument offered, she said.
“Dufoe has sufficiently alleged the asset pooling requirement because the revenue generated from the sale of NFTs was reinvested in DraftKings’ business, including through the promotion of the Marketplace,” Casper said.
Dufoe expected profits from capital appreciation, believing that the value of NFTs would be driven upward if DraftKings maintained investor interest and demand on the Marketplace, Casper said. To support his theory, he pointed to a “high-level financial overview of each NFT” provided to investors by DraftKings, and statements from DraftKings executives about the profit potential of NFTs, she said. Dufoe’s evidence “plausibly alleged that he was led to expect reasonable profits from his NFT purchase,” she said.
Dufoe also “plausibly alleged that the values of NFTs were dependent on the success of the DraftKings Marketplace,” Casper said. “While NFTs are nonfungible assets whose prices do not rise and fall uniformly, it is still plausible for this Court to infer, and for Plaintiffs to expect, that if DraftKings were to increase additional demand for its NFTs while limiting supply, the value of most NFTs in the ecosystem would increase,” she said, denying DraftKings’ motion to dismiss.
Fata Law LLC; Hannafan & Hannafan Ltd.; Kirby McInerney LLP; and Berman Tabacco represent Dufoe. Wilmer Cutler Pickering Hale & Dorr LLP; Benjamin R. Walker of Springfield, Mass.; and Sullivan & Cromwell LLP represent DraftKing and its executives.
The case is Dufoe v. DraftKings Inc.2024 BL 226098, D. Mass., No. 23-cv-10524-DJC, 7/2/24.