NFTs
US judge sets stage for NFT titles trial as DraftKings lawsuit moves forward
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A US judge in Massachusetts has denied a motion to dismiss a class action lawsuit against DraftKings claiming its NFTs are securities.
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This sets the stage for a future reckoning on NFTs as securities.
A US judge in Massachusetts has denied a lawsuit by DraftKings to dismiss a class action lawsuit filed by buyers of its non-fungible tokens (NFTs).
The lawsuit claims the tokens are investment contracts, setting the stage for a future court battle over whether NFTs are securities. DraftKings offers sports-themed NFTs on its marketplace through the Polygon blockchain.
Justin Dufoe, a buyer, first filed suit against DraftKings on behalf of other owners in March 2023claiming that these NFTs met the requirements of the Howey test.
In this recent decision, a court agreed that DraftKings’ NFTs involved an investment of money, pooled assets into a common enterprise with shared risks and rewards, and created a reasonable expectation of profit from DraftKings’ efforts, plausibly qualifying them as securities under the Howey test.
It is plausible to argue that the values of the NFTs depended on the success of the DraftKings Marketplace, the court concluded, noting that value varies in tandem with interest in that particular marketplace, an issue that has been addressed in previous cases examining NFTs.
Dapper Labs faced a similar case
All this comes later Dapper Labs agreed in June to pay $4 million to settle a similar class action lawsuit. Fortune previously reported that the SEC had previously launched an investigation into Dapper Labs but closed it in September 2023.
However, the difference between Dapper Labs’ NFTs and those offered by DraftKings is that Dapper uses its own proprietary blockchain called Flow, while DraftKings issues its tokens on Polygon.
Using Flow, a private chain, the court decidedstands for Dapper Labs is at greater risk of violating securities laws because its Flow blockchain created a dependency on Dapper’s management efforts and success, satisfying the Howey test criteria of a common enterprise and profit expectation.
A date has not yet been set to continue the DraftKings class action lawsuit.