This landmark case paves the way for future legal battles to determine whether NFTs are investment contracts and therefore classified as securities. DraftKings offers sports-themed NFTs on its marketplace via the Polygon blockchain.

Justin Dufoe, the man behind the lawsuit, filed a lawsuit against DraftKings on behalf of other NFT holders in March 2023. Dufoe and other plaintiffs argued that these NFTs met the criteria of the Howey test.

The Howey test is a legal test used to determine whether a transaction is a security and has three basic criteria: the investment of money, shared risks and profits in a joint venture, and the investor’s expectation of profiting from the efforts of others.

In this latest decision, the court agreed that DraftKings’ NFTs met all three criteria. The court stated that DraftKings’ NFTs involved the investment of money, were combined with shared risks and profits in a joint venture, and created an expectation that DraftKings would profit from its efforts. Therefore, the court concluded that these NFTs could be classified as securities under the Howey test.

The court also plausibly argued that the values ​​of these NFTs depended on the success of the DraftKings Marketplace. This showed that the value of NFTs moves with interest in the relevant marketplace. This issue has also been addressed and evaluated similarly in previous cases examining NFTs.

All of this comes after Dapper Labs agreed to pay $4 million in June to settle a similar class action lawsuit. Fortune previously reported that the SEC opened an investigation into Dapper Labs but closed it in September 2023.

However, the difference between Dapper Labs’ NFTs and those offered by DraftKings is that Dapper uses its own private blockchain, Flow, while DraftKings issues its tokens on Polygon. The court stated that Flow being a private chain increased the risk that Dapper Labs would violate securities laws.

Because the Flow blockchain established commitment to Dapper’s managerial efforts and success and met the joint venture and profit expectation criteria of the Howey test. This dependence on Flow showed Dapper Labs at a higher risk of breach.

DraftKings’ NFTs may require different consideration because they are traded on the Polygon blockchain. Since Polygon is an open and decentralized blockchain, the way users access and use these tokens is controlled by a larger network of participants.

This may reduce the dependence on DraftKings’ tokens from administrative efforts and make them less likely to be classified as securities.

The outcome of this case could have a significant impact on the legal status of NFTs and future regulatory frameworks. If the court classifies DraftKings’ NFTs as securities, it could set a precedent for other NFT projects and platforms.

As NFT markets face such legal uncertainty, they may demand greater transparency and regulatory guidance for investors and users.

The date on which the DraftKings class action lawsuit will resume has not yet been determined. This process will be closely watched for all stakeholders who want to see how the legal status and regulatory scrutiny of NFTs will shape up. The outcome of the lawsuit could be a major turning point not just for DraftKings, but for the entire NFT industry.