In a significant judicial decision, a Massachusetts judge has denied DraftKings’ motion to dismiss a class action lawsuit filed by purchasers of its non-fungible tokens (NFTs). This lawsuit, which could potentially classify NFTs as securities, sets a precedent for future legal battles in the burgeoning digital asset realm.

The lawsuit, initiated by Justin Dufoe on behalf of fellow NFT owners in March 2023, contends that these tokens constitute investment contracts under the Howey test—a legal criterion for determining what constitutes a security. DraftKings offers these sports-themed NFTs on its marketplace via the Polygon blockchain.

The court’s recent ruling affirmed that DraftKings’ NFTs involved an investment of money, pooled assets into a common enterprise with shared risks and profits, and created a reasonable expectation of profit driven by DraftKings’ efforts. This aligns the NFTs with the Howey test’s parameters, thus suggesting their potential classification as securities.

Furthermore, the court noted that the value of these NFTs is intricately linked to the success of the DraftKings Marketplace. This correlation underscores the dependency on DraftKings’ managerial endeavors, a crucial aspect scrutinized in previous NFT-related cases.

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Parallel to Dapper Labs’ Legal Encounters

This development mirrors a similar scenario faced by Dapper Labs, which in June agreed to a $4 million settlement in a comparable class action suit. Fortune reported that the SEC had previously investigated Dapper Labs but closed the inquiry in September 2023.

A pivotal distinction, however, lies in the blockchain technology employed. Dapper Labs utilizes its proprietary blockchain, Flow, whereas DraftKings issues its tokens on Polygon. The court determined that Flow, being a private chain, heightened Dapper Labs’ vulnerability to securities law violations due to the dependency it created on Dapper’s managerial success, fulfilling the Howey test’s criteria of a common enterprise and profit expectation.

As of now, a date for the continuation of the DraftKings class action lawsuit has not been scheduled, but this case undoubtedly sets the stage for critical discussions on the regulatory status of NFTs in the financial landscape.