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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