DraftKings Inc. has agreed to a $10 million settlement in response to a class-action lawsuit alleging that its sale of non-fungible tokens violated state and federal securities laws.
The lawsuit, initiated in 2023, argued that DraftKings’ NFTs should have been registered as securities, and the failure to do so constituted a legal violation.
The proposed settlement aims to compensate individuals who purchased, held, or sold DraftKings non-fungible tokens from Aug. 11, 2021, until the date the judgment is entered.
In a brief supporting the settlement’s approval, the plaintiffs described the agreement as the result of “vigorous litigation and serious, arm’s-length negotiation,” urging the court to deem it “fair, reasonable, and adequate,” according to Bloomberg.
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How to classify NFT’s
This legal challenge is part of a broader trend scrutinizing the classification of NFTs under securities law.
In a related case, Dufoe v. DraftKings Inc., a federal judge in Massachusetts ruled that the plaintiffs had plausibly alleged that DraftKings’ non-fungible tokens could be considered investment contracts under the Howey test, which determines what constitutes a security.
The court noted that, despite the NFTs trading on an independently existing blockchain, all transactions occurred through a marketplace controlled by DraftKings, thereby satisfying certain criteria of the Howey test.
These developments underscore the evolving legal landscape surrounding NFTs and their classification under securities laws.
Companies engaging in the creation and sale of NFTs are increasingly facing legal challenges that question whether these digital assets should be regulated as securities, prompting a reevaluation of business practices and compliance strategies within the burgeoning NFT market.
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