SNEAK PEEK
- DraftKings faces lawsuit over NFTs as potential investment contracts.
- Court ruling suggests DraftKings’ NFTs could be categorized as securities.
- Legal battles highlight regulatory uncertainty in NFT market.
In a recent legal development, a U.S. judge in Massachusetts has ruled against DraftKings’ attempt to dismiss a class action lawsuit concerning its non-fungible tokens (NFTs). The lawsuit, brought forth by purchasers of these tokens, claims they function as investment contracts, potentially categorizing them as securities. DraftKings, known for its sports-themed NFTs on the Polygon blockchain, faced allegations that these tokens met the criteria of the Howey test.
Justin Dufoe initiated the lawsuit in March 2023 on behalf of other token owners, arguing that DraftKings’ NFTs involved an investment of money in a common enterprise with shared risks and profits. The plaintiffs contended that purchasers had a reasonable expectation of profit based on DraftKings efforts, thus potentially classifying the NFTs as securities. The court’s recent decision supported these claims, noting the tokens’ value was tied to the success of DraftKings’ marketplace.
This ruling follows a $4 million settlement by Dapper Labs in a similar class action lawsuit, where it was alleged their NFTs also qualified as securities under the Howey test. Dapper Labs, which operates on its proprietary Flow blockchain, faced scrutiny due to the blockchain’s reliance on the company’s managerial efforts and its impact on token values.
The distinction between Dapper Labs and DraftKings lies in their blockchain infrastructures. While Dapper Labs uses Flow, a private blockchain, DraftKings employs Polygon. The court highlighted that Dapper Labs’ use of a private blockchain potentially heightened the risk of violating securities laws, as it could create dependencies on the company’s management and success.
Previously, the Securities and Exchange Commission (SEC) had investigated Dapper Labs but closed the case in September 2023. The ongoing legal battles over NFTs underscore the regulatory uncertainty surrounding these digital assets and their classification under securities laws.
DraftKings has yet to issue a statement regarding the recent court ruling. As the case progresses, it could set significant precedents for the treatment of NFTs in the realm of securities regulation, impacting how companies and investors navigate the evolving landscape of blockchain-based assets.
