Attempted Regicide: Class action alleges DraftKings NFTs are securities
DraftKings Inc., a popular online sports betting and gaming company, is facing a class-action lawsuit from non-fungible token (NFT) holders alleging that the company is operating an unregistered securities exchange, the DraftKings' Marketplace, and selling unregistered securities in the form of NFTs.
Filed in the United States District Court for the District of Massachusetts, the lead plaintiff, Justin Dufoe's, complaint alleges violations of federal and state securities laws. Dufoe also alleges that he suffered losses exceeding US$14,000 due to declines in the price of NFTs he purchased.
According to the DraftKings’ website, each DraftKings NFT has a unique digital identifier that certifies ownership of a virtual sports card or digital art as an NFT, which cannot be reproduced or deleted.
The complaint alleges that the NFTs in question are securities for the purposes of the Securities Exchange Act of 1934:
Plaintiff and the Class bought DraftKing's NFTs in DraftKing's initial public offerings (called "drops") of the NFTs, with the expectation that the DraftKing's NFT platform would allow them to realize profits on their NFTs.
DraftKings Chief Executive Officer, Chief Financial Officer and President of North American operations are also facing allegations from the class-action concerning their individual involvement in alleged breaches of securities law.
The complaint asserts that the defendants had actual knowledge of the facts indicating that the NFTs they promoted and sold were 'securities' under federal and state securities laws and that they had failed to register the NFTs accordingly.
DraftKings and its executives are facing seven causes of action from the class action including:
Sale of unregistered securities;
Control person liability for violations of the Securities Act;
Operating an unregistered securities exchange;
Unregistered broker and dealer;
Control person violations of the Exchange Act;
Unregistered broker and dealer (State Law); and
Sale of unregistered securities (State Law).
The DraftKings class action follows hot on the heels of a similar suit relating to Dapper Labs' NBA Top Shot NFT collection and marketplace. In a recent ruling in that case, the US Court allowed similar allegations of breaches of securities laws relating to the issuance of sports related NFTs to proceed to trial. In that ruling, the judge placed some emphasis on the fact the Top Shot NFTs were offered on a private blockchain, called Flow, which meant that holders are allegedly reliant on the continued efforts of Dapper Labs to support the NFT offering. It will be interesting to see whether the judge in this case attributes any weight to the fact that DraftKings' NFTs are minted and trade on Polygon, which is a layer 2 blockchain which runs on Ethereum.
The latest class action against DraftKings is likely to result in increased scrutiny of the securities aspects of NFT offerings in the United States and other jurisdictions.