Nfts
DraftKings faces lawsuit claiming its NFTs are securities (1)
DraftKings Inc. and its executives have failed to convince a federal court to dismiss a proposed class action 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 that he and others in his proposed class expected to make a profit on the NFTs, but he sold some of them at a loss and many of the ones he still held were worthless. alleged DraftKings violated securities laws when selling NFTs and should refund buyers. DraftKings said NFTs were not securities
Dufoe adequately argued 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 ruled 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 can also be sold on different platforms, Casper said. But DraftKings retains the discretion to determine which other platforms can be used and is entitled to a royalty when an outside platform is used, she said.
DraftKings’ first NFTs, released in August 2021, featured Tom Brady and sold for between $12 and $1,500 each, Casper said. But in February 2022, DraftKings began offering “gamified” NFTs, she said. These NFTs represented current NFL players in rarity tiers based on star status, but there was no guarantee which star tiers would be included in a given pack, she said. DraftKings pitched them as good investments and opened a chat room where the gamified NFTs were traded like stocks, she said.
While DraftKings has said NFTs are not securities, a security is an “investment contract” in which a person invests their money in a common enterprise and is led to expect profits from the sponsor, Casper said.
DraftKings has not debated whether NFTs are an investment of money, Casper said. A pooled venture is one where multiple investors pool assets together in a way that allows them to share all of the profits and risks of the venture, she said. Pooling occurs when funds received by the sponsor are essentially reinvested by the sponsor back into the venture, increasing the value of the proposed instrument, she said.
“Dufoe has adequately invoked the asset pooling requirement because the revenue generated from the sale of NFTs was reinvested into 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 higher if DraftKings maintained investor interest and demand on the marketplace, Casper said. To support his theory, he pointed to a “high-level financial review of each NFT” provided to investors by DraftKings, and to statements by DraftKings executives regarding the profit potential of NFTs, she said. Dufoe’s testimony “plausibly alleged that he was led to reasonably expect profits from his purchase of NFTs,” she said.
Dufoe also “plausibly alleged that the value of the NFTs was dependent on the success of the DraftKings marketplace,” Casper said. “Although 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 generate 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 officers.
The case is Dufoe v. DraftKings Inc.2024 BL 226098, D. Mass., No. 23-cv-10524-DJC, 7/2/24.