Moving Forward with The Draftkings Lawsuit: Upcoming NFT Securities Trial

DraftKings offers sports-themed NFTs on its marketplace. These NFTs are issued via the Polygon blockchain. The lawsuit was first filed by Justin Dufoe in March 2023. He filed the suit on behalf of other NFT owners.  

The main allegation is that these NFTs meet the criteria of the Howey test, which is used to determine if an asset is a security. 

The Howey Test 

The Howey test is a standard used by the courts to determine if a transaction qualifies as an investment contract. It involves four criteria: 

1. An investment of money. 
2. In a common enterprise. 
3. With an expectation of profits. 
4. Solely from the efforts of others. 

Court’s Ruling 

In this recent ruling, the court agreed with the plaintiffs. The court found that DraftKings’ NFTs: 

• Involved an investment of money. 

• Pooled assets into a common enterprise. 

• Established reasonable expectations of financial gain from DraftKings’ endeavors. 

The court noted that the value of these NFTs was tied to the success of the DraftKings Marketplace. This means the value of the NFTs moves with interest in the marketplace. 

Comparison to Dapper Labs Case 

This case is similar to a recent case involving Dapper Labs. In June, Dapper Labs agreed to pay $4 million to settle a similar class action suit. The SEC had investigated Dapper Labs but closed the investigation in September 2023. 

However, there is a key difference between the two cases. Dapper Labs uses its own proprietary blockchain called Flow. In contrast, DraftKings issues its tokens on Polygon. The court decided that using a private blockchain like Flow creates a higher risk of violating securities laws. This is because Flow created a dependency on Dapper Labs’ managerial efforts and success. 

What’s Next? 

The date for the continuation of the DraftKings class action suit has not yet been set. This case could have significant implications for the NFT market. If the court rules that these NFTs are securities, it could lead to increased regulation and oversight of NFTs. 

Key Points 

This case highlights the evolving landscape of NFT regulation and its potential impact on the broader market. Stay tuned for updates as this legal battle progresses.