A federal judge determined that the non-fungible tokens (NFTs) available on DraftKings Marketplace are eligible to be sold as securities, meaning that the business DraftKings (NASDAQ: DKNG) will be subject to class action lawsuits.
US District Judge Denise Casper decided on Tuesday that the lawsuit can move forward because the digital trading cards that were offered on Marketplace to players in DraftKings' Reignmakers fantasy games satisfied the Howey Test barrier.
The famous 1946 Supreme Court decision SEC v. W.J. Howey Co. served as the model for the Howey Test. Since then, four standards have been established by the high court to decide whether an asset qualifies as a security or not. These standards include monetary investment, profit anticipation, joint venture, and investment success reliant on entities other than the individual investor. Casper determined that the plaintiffs' complaint against DraftKings satisfied those requirements.
"Thus, while the Howey test remains crucial in discerning the line between securities and non-investments, its application has varied based on jurisdiction, the specifics of the case, and changes in the types of financial products being offered,” according to Investopedia.
A piece of data kept on the blockchain is called an NFT. NFTs can be used on a variety of digital objects, including images, video, and audio files. Justin Dufoe, an Illinois resident, filed the lawsuit in March 2023 in US District Court in Boston. He says he purchased NFTs on DraftKings Marketplace and lost about $14,000.
Unfavorable Time for DraftKings' NFT Attempts
With the NFT business flourishing in the middle of 2021, DraftKings revealed plans for DraftKings Marketplace. Reignmakers is Marketplace's fantasy sports app, and it runs on the Polygon blockchain.
Users build collections of gamified NFT cards through pack drops, auctions, and secondary market trades with Reignmakers. Over those seasons, participants use such cards in NFL, PGA Tour, and UFC fantasy football competitions. Unfortunately, the timing was bad for Reignmakers players who were expected to benefit from their digital trading cards, since NFT values crashed shortly after and activity dried up. In the 2023 court complaint, Dufoe's attorneys stated that his client had bought almost $72,000 worth of NFTs on the DraftKings Marketplace, but that the tokens' value has now dropped to $58,000.
Additionally, the lawsuit claims that DraftKings neglected to register its NFTs as securities with the Securities and Exchange Commission (SEC) during the class period. DraftKings may come under regulatory scrutiny if it is demonstrated, as the SEC has conducted enforcement measures and has classified NFTs as securities.
DraftKings Marketplace is far more than just a virtual trading card store, as seen by Casper's choice. Instead, the judge stated that it is a securities exchange, which may indicate that DraftKings is engaging in unlicensed securities trading.
Recent History Is Not in DraftKings' Favor
Despite the fact that NFTs are a relatively new asset class, the plaintiffs in the DraftKings Marketplace case may benefit from some existing legal precedent.
US District Judge Victor Marrero declared in 2023 that the NBA trading cards distributed by Dapper Labs-owned NBA Top Shot were securities. The sale and resale of those NFTs on Dapper's platform brought in a total of $153 million, and this month the US District Court for the Southern District of New York ordered the firm to pay $4 million to the plaintiffs. The plaintiffs sued Dapper, arguing that the NFTs for the NBA Top Shot constitute securities.
Additionally, the SEC claimed that two NFT issuers were selling unregistered securities in 2023 and collected a total of $1.5 million in fines from them.