DraftKings Marketplace faces class-action lawsuit as NFT prices fall
Posted on: 17 March 2023, 03:25h.
Last updated: 17 March 2023, at 03:25.
DraftKings (NASDAQ: DKNG ) was hit with a federal class-action lawsuit this week related to declining values of the non-fungible tokens (NFTs) offered on the company’s DraftKings Marketplace.
An NFT is a unit of data stored on the blockchain. NFTs can be applied to a variety of digitized items, such as audio and video files, as well as images. The suit filed earlier this month in US District Court in Boston was filed by Illinois resident Justin Dufoe who claims he lost approximately $14,000 on NFTs he purchased on the DraftKings Marketplace. The defendant has its headquarters in Boston.
In the complaint, Dufoe claims that because users of the marketplace were “entirely dependent on the management efforts of DraftKings,” clients were made vulnerable by the company’s actions.
The profits would be realized when plaintiffs and the class would sell their NFTs on the secondary market platform that DraftKings exclusively owned and operated, with DraftKings receiving exchange-like fees and commissions from the purchases and sales on its secondary market platform,” according to the Legal Document.
The lawsuit also alleges that during the class period, DraftKings failed to register its NFTs as securities with the Securities and Exchange Commission (SEC). If accurate, the sportsbook operator could be subject to increased regulatory scrutiny as the SEC considers classifying NFTs as securities.
DraftKing’s NFT History
DraftKings launched its NFT business in mid-2021 at a time when interest in the asset class and prices were sky high.
The gaming company partnered with Autograph, an NFT fundraising platform founded by legendary quarterback and seven-time Super Bowl champion Tom Brady. In 2021, an NFT produced by the artist known as Beeple sold for more than $69.3 million at a Christie’s auction. That year, DraftKing board member Shalom Meckenzie spent $11.8 million on the NFT known as “CryptoPunk #7523” at a Sotheby’s auction.
That enthusiasm quickly faded when NFT prices fell last year. As for Dufoe, he purchased $72,261 worth of NFTs on the DraftKings Marketplace, and it’s estimated that those computer units are now worth around $58,000.
Underscoring recent weakness in the NFT space, Fanatics said in January it is selling its 60% stake in digital collectibles platform Candy Digital to Galaxy Digital for an undisclosed price.
What Can Come of DraftKing’s NFT Suit
It is difficult to predict the outcome of the class action. On the one hand, with DraftKings Marketplace being the only place where clients can buy and sell the company’s NFTs, a jury could decide that there is a burden on the gaming company to properly operate the NFT platform and do so without putting the client at risk for financial loss.
“Just as investors in traditional securities such as common stocks, preferred stocks, bonds and warrants that have different characteristics and profit opportunities are still equally dependent on the management efforts of the company, here the investors in DraftKings’ NFTs which are nominally linked to different players were completely dependent of DraftKings’ management efforts,” the legal complaint states.
On the other hand, class actions arising from vaporized securities often fail with courts ruling that investing involves risk and that issuers of investment products are not always responsible for market conditions that lead to price deterioration.
