On Tuesday, DraftKings (NASDAQ: DKNG) declared that it will shut down its nonfungible token (NFT) marketplace and stop the Reignmakers fantasy sports game linked to those NFTs.
The announcement came as the gaming firm encountered increasing legal obstacles concerning the classification of NFTs as investment securities, potentially exposing it to class action lawsuits. Earlier this month, US District Judge Denise Casper decided that a lawsuit against DraftKings could proceed since NFTs qualify as securities.
In her ruling, Casper determined that the plaintiffs satisfied the criteria for the Howey Test, a Supreme Court decision over sixty years old that established guidelines for monetary investment, profit expectations, shared ventures, and investment success reliant on entities outside the individual investor.
The lawsuit, submitted in March 2023 in the US District Court in Boston, was initiated by Illinois resident Justin Dufoe, who alleged he lost $14K on NFTs bought through DraftKings Marketplace. The outcome of the trial remains uncertain if the case had progressed further, but the gaming company committed to offering some compensation to Reignmakers participants.
“We have decided to offer all holders of Reignmakers digital game pieces the opportunity to relinquish those game pieces to DraftKings in exchange for a cash payment (subject to certain conditions). The payment amount will be based on factors that include, but are not limited to, the relative size and quality of your digital game piece collection,” according to a social media post by the gaming company.
DraftKings Marketplace, Reignmakers Hindered by Poor Timing
DraftKings introduced its NFT marketplace in July 2021 while excitement around NFTs was high and prices were skyrocketing. The announcement generated excitement as it involved a partnership with Autograph, an NFT collecting platform co-founded by Tom Brady, a seven-time Super Bowl champion quarterback.
Reignmakers was a fantasy sports game where players acquired sets of gamified NFT cards through auctions, pack drops, and secondary market deals, indicating that real money was at stake. Users would create lineups using their obtained NFTs in hopes of winning fantasy games and that the NFTs would increase in value. Nevertheless, only a few months after the inception of DraftKings Marketplace and Reignmakers, NFT prices plummeted, hindering demand for those elements of the gaming firm’s offerings.
"After careful consideration, DraftKings has decided to discontinue Reingmakers and our NFT Marketplace, effective immediately,” according to the post. “This decision was not made lightly, and we believe it is the right course of action.”
Reignmakers ran on the Polygon blockchain, which is a digital currency, and its prices also plummeted during the so-called “crypto winter” of 2022.
Closures Might Be Wise Legal Decisions
Closing off units that once held great potential is a challenge for any organization, no matter the sector, but for DraftKings Marketplace and Reignmakers, the gaming firm might have made a wise legal choice.
Lately, regulators have heightened their scrutiny of NFT sellers, imposing fines on some for selling the tokens without registering them as securities. Last year, a US district judge determined that the NFTs offered on the NBA Top Shot platform were classified as securities, leading to a $4 million award for the plaintiffs who filed a lawsuit against operator Dapper.
In a separate case in 2023, the Securities and Exchange Commission (SEC) mandated Impact Theory to pay $6.1 million for disgorgement, prejudgment interest, and a civil penalty, stating that the company's approach to selling NFTs was similar to how securities are marketed.