DraftKings lawsuit advances in the US, ushering a new era for NFT securities trials

The ongoing legal battle involving DraftKings and its non-fungible tokens (NFTs) is poised to set significant precedents for the classification of NFTs as securities. A Massachusetts judge recently denied DraftKings' motion to dismiss a class action lawsuit filed by buyers of its NFTs, marking a critical step forward in this case. The lawsuit claims that DraftKings' NFTs constitute investment contracts and should be regulated as securities.

DraftKings, known for its daily fantasy sports and sports betting services, operates a marketplace for sports-themed NFTs on the Polygon blockchain. This lawsuit, initiated by plaintiff Justin DuFoe in March 2023, asserts that these NFTs are unregistered securities. DuFoe argues that many investors in these NFTs lack the necessary technical and financial expertise to fully understand the associated risks. He further claims that DraftKings' NFTs were marketed and sold with the promise of profit, contingent on the company's management of a secondary market platform.

DuFoe's allegations emphasize that investors were entirely dependent on DraftKings' efforts to manage and promote the NFTs, suggesting that the company's managerial decisions directly impacted the NFTs' value. This dependency aligns with the criteria of the Howey test, which is used to determine whether a financial instrument qualifies as a security.

The class action lawsuit, led by legal representatives Michael G. Bongiorno, Andrew S. Dulberg, and Michelle L. Sandals from Wilmer Cutler Pickering Hale and Dorr, accuses DraftKings of knowingly selling unregistered securities. The plaintiffs argue that the company profited substantially from these sales, violating federal and state securities laws.

The lawsuit seeks to represent a global class of individuals who have purchased or acquired DraftKings NFTs since August 11, 2021. It charges DraftKings with violating the Securities Act of 1933, the Securities Exchange Act of 1934, and two Massachusetts general laws. The plaintiffs are demanding a jury trial and an award of rescissory damages and interest.

In a related development, DraftKings faced another class action lawsuit earlier this year over improper payments following the cancellation of a National Football League game.

The court's recent ruling suggests that DraftKings' NFTs likely qualify as securities under the Howey test. This test assesses whether an instrument involves a financial investment, pooled assets, shared risks and profits, and a reasonable expectation of profit derived from the efforts of others. The court noted that the value of the NFTs fluctuates with interest in the DraftKings Marketplace, further supporting their classification as securities.

As this case progresses, it could have far-reaching implications for the regulation of NFTs, potentially ushering in a new era of legal scrutiny and regulatory oversight in the NFT and cryptocurrency markets.

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