Securities litigation arising from the purchase or sale of digital products such as cryptocurrencies, nonfungible tokens (NFTs) and security tokens has proliferated in recent years. A gating question in these cases is whether the digital product purchased is a “security” subject to federal or state securities laws.
On July 2, 2024, Judge Denise Casper of the U.S. District Court for the District of Massachusetts held in Dufoe v. DraftKings, Inc. that the plaintiff had adequately alleged that transactions in DraftKings NFTs were investment contracts and thus “securities” under the U.S. Supreme Court’s seminal test set forth in Howey.
The district court predicated this holding on allegations, accepted as true at the pleading stage, that DraftKings NFT sales reflected:
A “common enterprise” through horizontal commonality because (i) DraftKings allegedly pooled assets through reinvestment of revenue generated by the sale of the NFTs into its NFT business, and (ii) NFT purchasers allegedly shared profits and risks because DraftKings controlled the online “marketplace” through which the NFTs traded.
A “reasonable expectation of profits solely from the efforts of others” based on alleged DraftKings promotional statements about the investment prospects presented by the NFTs and because the value of the NFTs allegedly depended on the success of DraftKings’ “marketplace.”
Dufoe marks just the second case in which a court has addressed whether sales of NFTs may constitute securities under the rubric of Howey. In 2023, Judge Victor Marrero of the U.S. District Court for the Southern District of New York held in Friel v. Dapper Labs, Inc. that a complaint adequately alleged that the sale of National Basketball Association (NBA) Top Shot Moments NFTs constituted investment contracts. The Friel court acknowledged that this conclusion was a “close call.”
Although Dufoe and Friel provide a framework for analyzing NFT transactions under Howey, neither decision preordains a result in…