If you are a fantasy sports betting aficionado, you are probably aware of Marketplace, a site where customers of the fantasy sports company DraftKings can buy or trade DraftKings-created digital trading cards of football players, UFC fighters and pro golfers.
DraftKings bills Marketplace and Reignmakers as a way for customers to build their own fantasy franchises and compete all season long based on the performance of their athletes.
But that’s not all they are, according to a ruling on Tuesday from a federal judge in Boston.
U.S. District Judge Denise Casper held that DraftKings customers can proceed with a lawsuit alleging that the digital trading cards sold at Marketplace and used to play Reignmakers are securities under the U.S. Supreme Court’s longstanding Howey test. The judge denied DraftKings’ motion to dismiss a prospective class action by customers who claim to have been induced to buy the digital trading cards, or nonfungible tokens, by DraftKings’ promises of profitability.
Under Casper’s reading of plaintiffs' allegations, Marketplace is not merely the digital-era equivalent of a baseball card shop or a collectibles dealer peddling Pokemon cards. It is a securities exchange — and DraftKings is an alleged dealer-broker of unregistered securities.
Casper said the plaintiffs, at least at this stage of the case, satisfied the Howey test, which defines securities (or investment contracts) as investments of money in a common enterprise with the expectation of profits that are solely derived from the efforts of the issuer or promoter.
Neither DraftKings nor its lawyers from Sullivan & Cromwell and Wilmer Cutler Pickering Hale and Dorr responded to my query on Casper’s ruling. Plaintiffs' lawyers at Kirby McInerney also did not respond.
As Casper noted in Tuesday’s ruling, she is not the first judge to conclude that NFTs are securities and that NFT issuers can be liable for selling unregistered securities. U.S. District Judge Victor Marrero ruled last year that Dapper Labs’ digital trading cards, which depicted highlights from National Basketball Association games, met the Howey test for securities. Dapper Labs, which allegedly reaped $112 million from the original sale of the NBA NFTs and $41 million from commissions on their resale, has since reached a preliminary $4 million settlement with a class of customers who bought the NFTs.
In addition, the U.S. Securities and Exchange Commission reached settlements last year with two other NFT issuers it accused of selling unregistered securities. Impact Theory, which raised nearly $30 million from the sale of NFTs, agreed to pay a $500,000 fine to the SEC. Stoner Cat, which raised $8.2 million from NFT sales, agreed to a $1 million fine to the regulator.
DraftKings’ profits allegedly dwarfed those in the other cases in which NFTs were deemed securities. The class complaint asserts that the company “reaped, or will reap, hundreds of millions of dollars in profits” from the sale or resale of its digital trading cards.
DraftKings’ lawyers tried in their dismissal motion to distinguish between the fantasy sports site’s NFTs and those at issue in the Dapper Labs case.
For one thing, they argued, the DraftKings cards have a real use: They are the means by which DraftKings customers can play the Reignmakers game. And the cards' value, DraftKings argued, is not entirely dependant on the company’s actions. The price of each digital card, the company said, can rise or fall based on the performance of the athlete it depicts — a factor entirely divorced from DraftKings’ control. Moreover, DraftKings said, customers can (at least theoretically) trade its digital cards on a public blockchain. By contrast, the Dapper Labs NFTs could be traded only on a proprietary blockchain.
DraftKings also disputed allegations that customers reasonably considered themselves to be engaged in a joint enterprise with the company and each other to drive up the value of the NFTs. It rebutted plaintiffs’ claims that DraftKings insiders hyped the investment potential of the digital cards, arguing that such pronouncements were from outside commentators, not company executive.
DraftKings also argued that the whole point of the Reignmakers game is to pit NFT purchasers against one another, not to cast them as investors with a common goal.
Casper said that some of the company's arguments might eventually undermine plaintiffs’ theory when the facts are fleshed out in discovery. But at the dismissal stage, the judge said, plaintiffs plausibly alleged that customers who bought DraftKings NFTs believed that the company was committed to pumping up the value of the digital cards for their mutual benefit.
“Although the NFTs are non-fungible assets whose prices do not uniformly rise and fall,” Casper wrote, “it is still plausible for this court to infer, and for plaintiffs to expect, that if DraftKings drummed up additional demand for its NFTs while limiting the supply, that the value of most NFTs in the ecosystem would rise.”
The market for NFTs, as you know, has dried up since its heyday a few years ago. But what’s especially interesting about the DraftKings case is that the company continues to issue new digital trading cards, albeit without calling them NFTs at the Marketplace or Reignmakers websites.
This class action, in other words, isn’t a mere relic of the bygone NFT era but an ongoing headache for a blockchain early adopter.
Read more:
US regulator fines Stoner Cats creator for offering NFTs
LA media company settles first SEC enforcement case over NFTs
U.S. judge permits lawsuit claiming NBA Top Shot NFTs are securities
