A class action lawsuit brought against online gaming company DraftKings Inc. relating to the company’s short-lived marketplace for non-fungible tokens, or NFTs, is likely to settle.[1] Because the case will not proceed to a trial on the merits, the resolution leaves open the question of whether NFTs constitute securities.
We previously reviewed the issue of whether NFTs are securities in NBA-Branded NFTs May Be Securities S.D.N.Y. Finds. That case, Friel v. Dapper Labs, Inc.,[2] a Southern District of New York court refused to dismiss a class action that alleged that Dapper Labs violated federal securities laws[3] when it issued of a series of NFTs of digital video clips of highlights from NBA games in 2019.
The Securities and Exchange Commission had already made clear that the agency considered then-current securities laws to be adequate to guide participants in the crypto-asset marketplace, stating:
“A digital asset should be analyzed to determine whether it has the characteristics of any product that meets the definition of "security" under the federal securities laws. … Both the Commission and the federal courts frequently use the "investment contract" analysis to determine whether unique or novel instruments or arrangements, such as digital assets, are securities subject to the federal securities laws.”[4]
Based on this, the Dapper Labs court looked to the long-established test for whether an asset qualifies as a security, which was set forth by the Supreme Court in SEC v. W.J. Howey Co. (the “Howey test”). The test describes a security as an investment contract where there is (1) an investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) to be derived from the efforts of others.[5] Although the Dapper Labs court allowed the case to move forward, the dispute was ultimately settled for $4 million and no ruling on the ultimate question of whether the NFTs qualified as securities was issued.[6]
As did the Dapper Labs court, the DraftKings court looked to Howey to begin its analysis and found that – as in Dapper Labs – “the DraftKings NFTs are sold or traded in the Marketplace controlled by DraftKings. Thus if DraftKings shut down the Marketplace or interest in the Marketplace evaporated, the value of the NFTs would plausibly drop to zero.”[7]
Defendants sought to distinguish their NFT operation from that of Dapper Labs by pointing to the independence of the blockchain on which the NFTs resided. Whereas in Dapper Labs, the NFTs existed on a proprietary blockchain owned and controlled by the NFT issuer, DraftKings’s NFTs were recorded on the Polygon blockchain, which is public and separate from DraftKings.[8] The court, however, was unpersuaded, pointing out that “DraftKings retained sole discretion to prohibit transfers of NFTs to personal wallets,” which was sufficiently similar to the “economic reality” at hand in Dapper Labs. [9]
The court concluded that, “At present, [plaintiff]’s allegations that DraftKings controls the primary and secondary market for its NFTs and that the NFTs values are dependent on the success of the Marketplace are sufficient to survive a motion to dismiss.”[10]
While the parties’ settlement means that NFT investors will have to wait for a clear ruling on the contours of whether and when this type of digital asset is considered a security, the SEC has taken steps that suggest that clarity may ultimately come from a different direction.
On January 21, 2025, the SEC’s acting chair, Mark Uyeda, “launched a crypto task force dedicated to developing a comprehensive and clear regulatory framework for crypto assets,” which will be led by Commissioner Hester Peirce.[11] The agency’s statement noted:
“The Task Force’s focus will be to help the Commission draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously.”[12]
Commenting in her personal capacity, Commissioner Peirce has highlighted the question of whether and when digital assets constitute securities as a priority for the Task Force, including how the Howey test has been applied:
“Market participants have expressed concern that the Howey test, as the Commission has applied it, is a complex analysis that can be difficult to apply consistently. One of the Task Force’s goals is to make it easier for investors, market participants, and the Commission to categorize crypto assets and crypto asset transactions.”[13]
[1] See Dufoe v. DraftKings Inc., Dkt. 1:23-cv-10534 (D. Mass.), ECF No. 87.
[2] Dkt. No. 1:21-cv-05837-VM (S.D.N.Y.).
[3] 15 U.S.C. § 77e.
[4] Framework for “Investment Contract” Analysis of Digital Assets, Secs. & Exch’g Comm’n, Apr. 3, 2019, available at https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.
[5] 328 U.S. 293 at 298-99.
[6] Dapper Labs, ECF No. 87.
[7] DraftKings, ECF No. 60 at 12.
[8] Id. at 13.
[9] Id.
[10] Id.
[11] SEC Crypto 2.0: Acting Chairman Uyeda Announces Formation of New Crypto Task Force, Secs. & Exch’g Comm’n, Jan. 21, 2025, available at https://www.sec.gov/newsroom/press-releases/2025-30.
[12] Id.
[13] There Must Be Some Way Out of Here, Comm’r H. Peirce, Feb. 21, 2025, available at https://www.sec.gov/newsroom/speeches-statements/peirce-statement-rfi-022125.
