Nfts
DraftKings NFT Securities Trial: Trial Moves Forward
A U.S. judge has denied DraftKings’ motion to dismiss a class action lawsuit filed by buyers of the company’s non-fungible tokens (NFTs). The lawsuit accuses DraftKings, its CEO, CFO and chairman of allegedly violating federal securities laws with its NFTs.
DraftKings Accused of Selling Unregistered Securities
In March 2023, Justin Dufoe filed a class action lawsuit against DraftKings, a sports betting and fantasy sports company. In his complaint, the plaintiff claims that the company’s non-fungible tokens should be considered “investment contracts” under the Howey test.
DraftKings spear The “DraftKings Marketplace” was launched in 2021 using the Polygon blockchain. The marketplace offered “digital collectibles in the sports, entertainment, and culture sectors.” Its first NFT featured American football player Tom Brady and sold for between $12 and $1,500 each.
Justin Dufoe's lawsuit against DraftMakers. Source: CourtListener
Dufoe claims that the sports betting company’s NFTs are securities under federal law. Additionally, the complaint alleges that the defendants knowingly sold unregistered securities and profited from their sales:
Defendants had actual knowledge that the NFTs they promoted and sold were “securities” under federal and state securities laws and that they failed to register their NFTs as securities. Defendants have reaped, or will reap, hundreds of millions of dollars in profits from their unregistered securities sales.
In October, DraftKings filed a motion to dismiss the trialarguing that their NFTs are not securities “and therefore are not subject to the registration requirements of the Securities Act of 1933 or the Securities and Exchange Act of 1934.”
US judge denies motion to dismiss NFT lawsuit
On July 2, the U.S. District Court of Massachusetts dismissed the motion because the plaintiff “plausibly alleged that the DraftKings NFTs are investment contracts, and therefore securities, under the Howey test.”
Us Judge rejects DraftKings' motion to dismiss the lawsuit. Source: CourtListener
The court document states that Judge Denise J. Casper did not want to debate whether NFTs involved an “investment of money.” Instead, the court focused on the remaining elements of the Howey test:
At issue was whether Dufoe and other buyers were investing in a joint venture with the expectation of profiting solely from the efforts of others.
The applicant has sufficiently relied on the requirement of pooling of assets, where the pooling of assets of several investors is carried out “in such a way that all share the profits and risks of the enterprise”.
According to the document, “revenues generated from the sale of NFTs were reinvested into DraftKings’ operations, including through the promotion of the Marketplace.” This met the “horizontal community” quality of the joint venture requirement.
Dufoe also plausibly alleged a reasonable expectation of profits from the DraftKings NFT purchase. As attorney Rob Freund explains, waiting was “based on capital appreciation generated by DraftKings’ efforts to maintain investor interest and market demand.”
The company’s promotional activities and marketing campaign encouraged customers to view digital collectibles as “investments that could increase in value.”
Finally, the plaintiff plausibly alleged that the expected profits would come from the significant efforts of others, rather than investors. As such, the price of the NFTs was dependent on the company’s efforts and promotion.
The Court ultimately held that “the primary forces driving the market price of NFTs were a factual issue not amenable to resolution by a motion to dismiss.” As a result, the upcoming legal battle could have further implications for the legal status NFTs and industry.
Ethereum (ETH) is trading at $3,288.59 on the three-day chart. Source: ETHUSDT on TradingView
Featured image from Unsplash.com, chart from TradingView.com