Court Decision Threatens DraftKings’ NFT Enterprises

DraftKings, the prominent online sportsbook operator, is grappling with significant legal and business challenges. A US Judge in Massachusetts recently denied DraftKings’ motion to dismiss a class action lawsuit related to its non-fungible tokens (NFTs), while the operator may also be considering selling off its unsuccessful VSiN media business at a significant loss.

NFT Tech Investments Are in Jeopardy

An ongoing class action lawsuit, initiated by buyer Justin Dufoe on behalf of other NFT owners, argues that DraftKings’ sports-themed NFTs, offered on the Polygon blockchain, qualify as investment contracts. This classification could potentially categorize them as securities under the Howey test, a legal benchmark used to determine whether certain transactions qualify as investment contracts.

In its ruling, the court found that DraftKings’ NFTs involved an investment of money pooled into a common enterprise with shared risks and profits. The court noted that the value of these NFTs appeared to directly correlate to the success of the DraftKings Marketplace, which aligns with the criteria for securities under the Howey test.

This decision sets the stage for a historic court battle to determine if NFTs are indeed securities, a classification that would bring significant regulatory implications for DraftKings and similar platforms. Redefining NFTs as securities could substantially undermine the operator’s investments in the technology, potentially setting a precedent for further legal action against the company.

The Legal Battle Is Far from Lost

According to a recent Coindesk article, this case mirrors a recent lawsuit involving Dapper Labs, another NFT provider. In June, Dapper Labs agreed to pay $4 million to settle a class action suit alleging its NFTs were unregistered securities. The Securities and Exchange Commission (SEC) had investigated Dapper Labs but closed the case in September 2023.

A significant difference between the two cases is the blockchain used. Dapper Labs’ NFTs are issued on its proprietary Flow blockchain, while DraftKings uses the widely adopted Polygon blockchain. The court found that Dapper Labs’ private blockchain created a higher risk of securities law violations due to increased dependency on the company’s managerial efforts and success.

While the court has yet to set a date to proceed with the class action lawsuit, the decision to deny the motion to dismiss places DraftKings in a challenging legal position. If the court ultimately rules that its NFTs are securities, DraftKings may face increased regulatory scrutiny and compliance costs.