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

A Massachusetts judge has refused DraftKings’ motion to dismiss a class action lawsuit filed by buyers of its non-fungible tokens (NFTs). The suit contends that the tokens constitute investment contracts, paving the way for a future legal struggle over whether NFTs are securities. 

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DraftKings, a daily fantasy sports and sports betting site sells sports-themed NFTs in its marketplace using the Polygon blockchain. The United States SEC has gone after several cryptocurrencies claiming they are securities, and that did not age well. The present shift to NFTs stands to usher in a new era of NFTs classification.

A new legal era of NFTs trial on unregistered securities

Plaintiff Justin DuFoe claims the DraftKings NFTs constitute unregistered securities and that many of the investors who buy them “lack the technical and financial sophistication necessary to evaluate the risks associated with their investment.” DuFoe filed a lawsuit against the entity in March 2023.

DuFoe claims that he and other customers purchased DraftKings NFTs at the company’s first public offering, hoping the NFT platform would enable them to “realize profits.” The lawsuit alleges:

The profits would be realized when the Plaintiffs and the Class sell their NFTs on the secondary market platform that DraftKings owned and managed solely.

Lawsuit 

DuFoe alleges he and others were eventually “entirely dependent” on DraftKings’ managerial efforts when they purchased the NFTs and later sold them on a secondary market controlled by the company. 

Michael G. Bongiorno, Andrew S. Dulberg, and Michelle L. Sandals from Wilmer Cutler Pickering Hale and Dorr stepped in to represent DraftKings.

DraftKings investment contracts brought into question?

According to the class action lawsuit, the NFT entity “had actual knowledge of facts,” indicating that the NFTs they advertised and sold were securities under federal and state securities laws but failed to register them.

Source: Esports.net

The class action reads that “Defendants reaped or will reap, hundreds of millions of dollars in profits from their unregistered securities sales.”

DuFoe seeks to represent a worldwide class of individuals who have purchased or otherwise acquired a DraftKings NFT since August 11, 2021. 

The NFT entity is charged with violating the Securities Act of 1933, the Securities Exchange Act of 1934, and two Massachusetts general laws.

The plaintiff is seeking a jury trial and an award of rescissory damages and interest for himself and other class members.

In January, DraftKings faced another class action lawsuit from a consumer alleging improper payment to users after canceling a National Football League game on January 2nd.

Court finds DraftKings’ NFTs meet securities criteria under Howey test

According to a recent ruling, the court determined that the NFTs were likely to qualify as securities under the Howey test because they involved a financial investment, pooled assets into a shared business with shared risks and profits, and generated a reasonable expectation of profit from its’ operations.

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The court concluded that it is reasonable to argue that the values of the NFTs were reliant on the DraftKings Marketplace’s success, pointing out that the value fluctuates in proportion to interest in that particular marketplace—a problem that has been explored in earlier NFT instances.

What lies ahead in the DraftKings NFT lawsuit?

It’s challenging to predict how the class action lawsuit will turn out. The marketplace is the sole area where customers can purchase and sell the firm’s NFTs. A jury may find that the gaming company has an obligation to manage the NFT platform appropriately to protect customers from financial loss.

Just as investors of traditional securities such as common stock, preferred stock, bonds, and warrants that have different features and profit opportunities are still equally dependent on the managerial efforts of the company, here the investors of DraftKings’ NFTs nominally associated with other players were entirely reliant on DraftKings’ managerial efforts.

Legal complaint

However, class action lawsuits resulting from lost securities values frequently end in a courtroom battle when judges decide that investing entails risk and that investment product producers are not necessarily accountable for market conditions that cause prices to decline.

Cryptopolitan Reporting by Florence Muchai