A U.S. judge in Massachusetts has denied a motion to dismiss a class action lawsuit against DraftKings, claiming its NFTs are securities.
This sets the stage for a future trial of NFTs as securities.
A US judge in Massachusetts has rejected an attempt by DraftKings to dismiss a class action lawsuit brought by buyers of its non-fungible tokens (NFTs).
The lawsuit claims the tokens are investment contracts, paving the way for a future lawsuit over whether NFTs are securities. DraftKings offers sports-themed NFTs on its marketplace via the Polygon blockchain.
Justin Dufoe, a buyer, first filed suit against DraftKings on behalf of other owners March 2023, claiming that these NFTs met the requirements of the Howey test.
In this recent ruling, a court agreed that DraftKings’ NFTs involved an investment of money, pooled assets into a joint venture with shared risks and profits, and created a reasonable expectation of profit from DraftKings’ efforts, making them plausible classified as effects under the Howey test.
It is plausibly argued that the values of the NFTs were dependent on the success of the DraftKings Marketplace, the court ruled, noting that the value moves in tandem with interest in that particular market, an issue addressed in previous cases involving NFTs were investigated.
Dapper Labs faced a similar case
All this comes next Dapper Labs agreed in June to pay $4 million to settle a similar class action lawsuit. It was previously reported by Fortune that the SEC once launched an investigation into Dapper Labs, but closed it in September 2023.
However, the difference between Dapper Labs’ NFTs and DraftKings’ is that Dapper uses its own proprietary blockchain called Flow, while DraftKings issues its tokens on Polygon.
The use of Flow, a private chain, the court decided means Dapper Labs is at greater risk of violating securities laws because the Flow blockchain created a dependency on Dapper’s management efforts and success, and meets the Howey test criteria of a joint venture and earnings expectations.
No date has yet been set for the continuation of the DraftKings class action lawsuit.