The class action suit from DraftKings buyers alleges that NFTs are investment contracts.

Updated Jul 31, 2024, 8:55 a.m. Published Jul 3, 2024, 5:59 a.m.

• A U.S. judge in Massachusetts has denied a motion to dismiss a class action suit against DraftKings alleging its NFTs are securities.
• This sets the stage for a future trial about NFTs as securities.

A U.S. Judge in Massachusetts has denied a move by DraftKings to dismiss a class action lawsuit brought on by buyers of its non-fungible tokens (NFTs).

The suit alleges that the tokens are investment contracts, setting the stage for a future court battle on whether NFTs are securities. DraftKings offers sports-themed NFTs on its marketplace via the Polygon blockchain.

Justin Dufoe, a buyer, first filed suit against DraftKings, on behalf of other owners in March 2023, alleging that these NFTs met the prongs for the Howey test.

In this recent ruling, a court agreed that DraftKings' NFTs involved an investment of money, pooled assets into a common enterprise with shared risks and profits, and created a reasonable expectation of profit from DraftKings' efforts, thus plausibly classifying them as securities under the Howey test.

It is plausibly alleged that the NFTs' values were dependent on the success of the DraftKings Marketplace, the court found, noting that the value moves in tandem with interest in that specific marketplace, an issue that has been addressed in prior cases examining NFTs.

Dapper Labs faced a similar case

All this comes after Dapper Labs agreed in June to pay $4 million to settle a similar class action suit. It was reported earlier by Fortune that the SEC had once launched an investigation into Dapper Labs but closed it in September 2023.

However, the difference between Dapper Labs' NFTs and those offered by DraftKings is that Dapper used the Flow blockchain while DraftKings issues its tokens on Polygon.

The use of Flow, a chain developed by Dapper Labs that was spun off in October 2021, the court decided, means Dapper Labs runs a higher risk of violating securities laws because that created a dependency on Dapper’s managerial efforts and success, satisfying the Howey test criteria of a common enterprise and expectation of profit.

A date to continue the DraftKings class action suit has not yet been set.

UPDATE (July 23, 08:55 UTC): Updates last two paragraphs to show Flow, while developed by Dapper Labs, was spun off in October 2021.