Online sports book DraftKings has settled a class-action lawsuit over its Reignmakers NFTs for $10 million. In March 2023, representative plaintiff Justin Dufoe filed suit. He claimed that these NFTs warrant the status of investment contracts under U.S. securities law. On February 28, 2025, the settlement was granted preliminary approval. This is the first time that has happened in the still unfolding saga of whether NFTs and other digital assets are securities.
The case picked up steam once U.S. District Judge Denise Casper denied DraftKings’ motion to dismiss it in July 2024. Judge Casper’s ruling was heavily focused on the Howey Test. This legal framework is used to assess whether particular transactions are investment contracts and thus fall under securities laws. Her opinion implied that DraftKings’ NFTs were likely securities, creating the path for the eventual settlement agreement.
The Genesis of the Lawsuit
Justin Dufoe warned that DraftKings’ Reignmakers NFTs were pitched and sold as investment contracts. This is what led to the lawsuit in the first place. These digital collectibles were made available within the DK Marketplace, DraftKings’ NFT buying, selling, and trading platform. Dufoe's legal challenge centered on the premise that purchasers of these NFTs were led to expect profits based on DraftKings' efforts, thus meeting the criteria established by the Howey Test.
The four-pronged Howey Test originated in a SCOTUS case. That’s important because one of the SEC’s primary tests for whether a transaction is an “investment contract” – and therefore a security under the Securities Act of 1933 and Securities Exchange Act of 1934 – is the Howey Test. The Howey test unequivocally lays out that an investment contract is formed when you invest your money in a common enterprise. It needs to involve a reasonable expectation of profits based on the efforts of others. Judge Casper's application of this test to the DraftKings case underscored the complexities of applying existing securities laws to novel digital assets.
The class-action suit could affect over 175,000 investors who bought and sold DraftKings NFTs on the DK Marketplace. After that, the class period would cover the entire time window during which these NFTs were purchased, sold, or owned. U.S. residents who engaged in these transactions yourself may be able to join together with others to claim some of the $10 million settlement.
Terms of the Settlement
The $10 million settlement aims to reimburse anyone who purchased, sold, or held DraftKings Reignmakers NFTs. This seems limited to those transactions completed during the defined class period. Where all that settlement money goes depends on a number of key factors. That will depend on how many claimants there are and how many NFT transactions they participated in. Information about the claims process and eligibility requirements will be provided to prospective class members.
In conjunction with settlement, SEJ member Justin Dufoe will be awarded a $50,000 service award. He received this honor for his work as the class’s lead plaintiff and representative. This award is intended to compensate Dufoe for the time, effort, and risk he undertook in commencing and pursuing the litigation. The settlement has provisions concerning payment of attorneys’ fees. Here’s how it breaks down. The settlement amount includes costs and fees related to the lawsuit.
Judge Casper has now granted preliminary approval of the settlement. This demonstrates that the court’s only standard is that the terms are fair, reasonable and adequate. As of now, the settlement is pending final approval. This decision will come after a fairness hearing to listen to any objections from members of the class. Once we get that final approval, the settlement will bind all of the class members. This will free DraftKings from any additional liability related to the allegations in the suit.
Implications for the NFT Market
The DraftKings NFT settlement has huge implications for the wider NFT market and the legal landscape surrounding digital assets at large. The recent case is significant because it reflects increasing interest in applying existing securities law to NFTs and a possible window into future regulatory enforcement action. By applying the Howey Test to NFTs, the court opened the door for these assets to be classified as securities. This is particularly true where sold and marketed such that purchasers are not surprisingly led to expect a return on their investment based on the efforts of others.
The outcome of this case could influence how NFT platforms and issuers structure their offerings to avoid potential securities law violations. Under these circumstances, it may become necessary for our regulatory authorities such as the Securities and Exchange Commission (SEC) to intervene. Specifically, they should provide more definitive direction on the applicability of securities laws to NFTs and other digital assets. Without a clear regulatory framework, there is significant uncertainty regarding this space for investors and market participants. This regulatory uncertainty creates tremendous liability in the fast-paced world of NFTs.
