CryptoDraftKings Faces Legal Battle Over NFTs Classified as Securities

DraftKings Faces Legal Battle Over NFTs Classified as Securities

A recent court ruling has set the stage for a significant legal battle, as DraftKings’ sports-themed NFTs are alleged to be investment contracts, potentially classifying them as securities under U.S. law.

The lawsuit, initially filed in March 2023 by Justin Dufoe on behalf of other NFT owners, claims that DraftKings’ NFTs meet the criteria of the Howey test, which is used to determine whether a transaction qualifies as an investment contract. According to the court, DraftKings’ NFTs involve an investment of money, pooling of assets into a common enterprise with shared risks and profits, and create a reasonable expectation of profit from DraftKings’ efforts.

The court noted that the value of these NFTs is closely tied to the success of the DraftKings Marketplace, indicating a dependency that aligns with previous cases examining NFTs.

Dapper Labs Case Sets a Precedent

This development follows a similar case involving Dapper Labs, which settled a class action suit for $4 million in June. The SEC had investigated Dapper Labs but closed the case in September 2023. Unlike DraftKings, which uses the Polygon blockchain, Dapper Labs employs its own proprietary blockchain called Flow. The court found that Flow’s private nature heightened the risk of securities law violations due to the dependency on Dapper Labs’ managerial efforts and success.

Next Steps for DraftKings

A continuation date for the DraftKings class action suit has not yet been scheduled. This case could have broad implications for the classification of NFTs and their regulation as securities, impacting both the NFT market and the wider blockchain industry.

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Andrew
Andrew
Self-taught investor with over 5 years of financial trading experience Author of numerous articles for hedge funds with over $5 billion in cumulative AUM and Worked with several global financial institutions. After finding success using his financial acumen to build an investment portfolio, Andrew began writing and editing articles about the cryptocurrency space for sites such as chaincryptocoins.com, ensuring readers were kept up to date on hot topics such as Bitcoin and The latest news on digital currencies and Ethereum.

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