DraftKings NFTs Securities Trial: Lawsuit Moves Forward

A US Judge has rejected DraftKings’ motion to dismiss the category motion lawsuit filed by the corporate’s Non-Fungible Token (NFT) buyers. The lawsuit accuses DraftKings, its CEO, CFO, and president of allegedly violating federal securities laws with its NFTs.

DraftKings Accused Of Selling Unregistered Securities

On March 2023, Justin Dufoe filed a putative class motion against sports betting and fantasy sports company DraftKings. Within the grievance, the Plaintiff asserts that the corporate’s non-fungible tokens must be considered “investment contracts” under the Howey Test.

DraftKings launched the ‘DraftKings Marketplace’ in 2021 using the Polygon Blockchain. The marketplace offered “digital collectibles across sports, entertainment, and culture.” Its first NFT featured football player Tom Brady and sold for $12 to $1,500 each.

 

Justin Dufoe's lawsuit against DraftMakers. Source: CourtListener

Dufoe asserts that the sports betting company’s NFTs are a security under federal law. Furthermore, the grievance 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’d did not register their NFTs as securities. Defendants reaped, or will reap, a whole lot of tens of millions of dollars in profits from their unregistered securities sales.

In October, DraftKings filed a motion to dismiss the lawsuit, arguing that their NFTs should not securities “and thus should 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 NFTs Securities Trial

On July 2, the US District Court District of Massachusetts denied the motion because the Plaintiff “plausibly alleged that the DraftKings NFTs are investment contracts, and due to this fact securities, under the Howey test.”

NFTs

Us Judge rejects DraftKings' motion to dismiss the lawsuit. Source: CourtListener

The Court document states that Judge Denise J. Casper wouldn’t debate whether the NFTs involved the “investment of cash.” As an alternative, the Court focused on the remaining elements of the Howey test:

Namely, whether Dufoe and other purchasers were investing in a typical enterprise with the expectation of profits derived solely from the efforts of others.

The plaintiff sufficiently alleged the pooling of assets requirement, where the pooling of assets from multiple investors is completed “in such a way that each one share within the profits and risks of the enterprise.”

Per the document, “the revenue generated by the sale of NFTs was reinvested into DraftKings’s business, including through the promotion of the Marketplace.” This satisfied the “horizontal commonality” quality of the common enterprise requirement.

Dufoe also plausibly alleged an affordable expectation of profits from purchasing DraftKings NFTs. As explained by Lawyer Rob Freund, the expectation was “based on capital appreciation driven by DraftKings’s efforts to take care of investor interest and demand within the Marketplace.”

The corporate’s promotional activities and marketing campaign encouraged customers to view the digital collectibles as “investments that would appreciate in value.”

Lastly, the Plaintiff plausibly alleged that the expected profits would come from significant efforts of others, as a substitute of investors. As such, the worth of the NFTs was reliant on the corporate’s efforts and promotion.

The Court ultimately considered “the first forces behind the market price of the NFTs a factual query that isn’t suited to resolution on a motion to dismiss.” In consequence, the upcoming legal battle could have further implications for the legal status of NFTs and the industry.

NFTs, ETH, ETHUSDT

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