U.S. Judge Establishes the Stage for NFT Securities Trial as DraftKings Lawsuit Advances

DraftKings purchasers have filed a class action lawsuit alleging that NFTs are investment contracts.

DraftKings’ attempt to dismiss a class action lawsuit initiated by purchasers of its non-fungible tokens (NFTs) has been rejected by a U.S. judge in Massachusetts.

The suit alleges that the tokens are investment contracts, thereby establishing the groundwork for a future court conflict regarding the classification of NFTs as securities. DraftKings provides sports-themed NFTs on its marketplace through the Polygon blockchain.

In March 2023, Justin Dufoe, a buyer, initiated litigation against DraftKings on behalf of other proprietors, asserting that these NFTs satisfied the prongs of the Howey test.

A court recently ruled that DraftKings’ NFTs were securities under the Howey test because they required an investment of capital, brought together assets in a joint venture with shared risks and rewards, and generated a reasonable expectation of profit.

The court determined that the NFTs’ values were potentially contingent upon the DraftKings Marketplace’s success, based on the fact that the value changes along with interest in that particular marketplace. This issue has been previously addressed in cases involving NFTs.

Dapper Labs consented to pay $4 million in June to resolve a comparable class action lawsuit. Prior to September 2023, Fortune reported that the SEC had initiated an inquiry into Dapper Labs.

Nevertheless, the distinction between Dapper Labs’ NFTs and those provided by DraftKings is that Dapper employs its own proprietary blockchain, Flow, whereas DraftKings issues its tokens on Polygon.

The court determined that Dapper Labs is at a greater risk of violating securities laws due to the use of Flow, a private chain. This is due to the fact that the Flow blockchain established a dependence on Dapper’s managerial efforts and success, satisfying the Howey test criteria of a common enterprise and expectation of profit. There is currently no established timetable for the continuation of the DraftKings class action lawsuit.

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