In an Announcement on July 30, 2024, DraftKings said that it had decided to discontinue its NFT Marketplace. DraftKings explained that its decision was not made lightly but was due to “recent legal considerations.” Although DraftKings did not elaborate any further on those considerations, last month, a judge in federal district court in Massachusetts refused to dismiss a proposed class action suit against DraftKings claiming that the NFTs that DraftKings sold on its Marketplace were unregistered securities.
That issue, of course, is determined under the Supreme Court’s longstanding Howey decision, which held that a contract constitutes an investment contract that meets the definition of security if there is (i) an investment of money; (ii) in a common enterprise; (iii) with an expectation of profits; (iv) solely from the efforts of others (e.g., a promoter or third party). As was the case with the NBA Hot Shots NFTs, DraftKings argued that the NFTs were no different than baseball cards or Pokémon cards and were certainly not securities.
The judge disagreed. There was no dispute as to the first Howey factor. As to the second, “common enterprise” can be established by showing “pooling of assets from multiple investors in such a manner that all share in the profits and risks of the enterprise.” The court said the plaintiff had sufficiently alleged the pooling of assets requirement, because the revenue generated by the sale of NFTs was reinvested into DraftKings’s business. As to the third factor, the court held that statements by DraftKings regarding “guaranteed scarcity” of certain NFTs could be plausibly interpreted as creating an expectation of profit. On the last factor, the court held that it was plausibly alleged that the NFTs values were dependent on the success of the DraftKings Marketplace.
Earlier this year, GameStop gave up on its NFT business. We reported last week about a pre-emptive lawsuit that two artists brought against the SEC seeking a declaration that their proposed NFT projects were not securities.
As was the case with cryptocurrency tokens, unless there are specific regulations put in place, there will remain significant uncertainty in the market, as well as the much-reviled regulation through litigation.
