A U.S. judge has denied DraftKings’ motion to dismiss a class action lawsuit brought by buyers of the company’s Non-Fungible Token (NFT). The lawsuit accuses DraftKings, its CEO, CFO and president of violating federal securities laws with its NFTs.
DraftKings Accused of Selling Unregistered Securities
In March 2023, Justin Dufoe filed a putative class action lawsuit against sports betting and fantasy sports company DraftKings. In the complaint, the plaintiff alleges that the company’s non-fungible tokens should be considered “investment contracts” under the Howey Test.
DesignKings launched the ‘DraftKings Marketplace’ in 2021 using the Polygon Blockchain. The marketplace offered “digital collectibles in sports, entertainment, and culture.” The first NFT featured football player Tom Brady and sold for $12 to $1,500 each.
Justin Dufoe's lawsuit against DraftMakers. Source: CourtListener
Dufoe alleges that the sports betting company’s NFTs are a security under federal law. Additionally, the complaint 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 had failed to register their NFTs as securities. Defendants reaped, or will reap, hundreds of millions of dollars in profits from their unregistered securities sales.
In October, DraftKings filed a motion to court casearguing that their NFTs are not securities “and thus 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 Securities Lawsuit
On July 2, the U.S. District Court for Massachusetts dismissed the request, finding that 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 declined to debate whether the NFTs involved the “investment of money.” Instead, the court focused on the remaining elements of the Howey test:
Namely, whether Dufoe and other buyers invested in a common venture with the expectation that profits would come exclusively from the efforts of others.
The claimant has sufficiently demonstrated that there is a pooling of assets, whereby the pooling of assets from several investors takes place “in such a way that everyone shares in the profits and risks of the enterprise.”
According to the document, “the proceeds generated from the sale of NFTs were reinvested in DraftKings’ operations, including through the promotion of the marketplace.” This satisfied the “horizontal commonality” quality of the common enterprise requirement.
Dufoe also plausibly alleged a reasonable expectation of profits from the purchase of DraftKings NFTs. As explained by attorney Rob Freund, the expectation was “based on capital growth driven by DraftKings’ efforts to maintain investor interest and market demand.”
The company’s promotional activities and marketing campaign encouraged customers to view the digital collectibles as “investments that can increase in value.”
Finally, the plaintiff plausibly alleged that the anticipated profits would come from significant efforts by others, rather than investors. As such, the price of the NFTs was dependent on the company’s efforts and promotion.
The Court ultimately considered “the primary forces driving the market price of the NFTs to be a question of fact not amenable to resolution in a motion to dismiss.” As a result, the coming legal battle could have further implications for the legal status of of NFTs and the industry.
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