Johnny Walker
Posted on: July 30, 2024, 02:01h.
Last updated on: July 30, 2024, 02:44h.
DraftKings (NASDAQ: DKNG) announced Tuesday that it is closing its nonfungible token (NFT) marketplace and halting the Reignmakers fantasy sports game that was based on those NFTs.
The news arrived as the gaming company faced mounting legal challenges regarding the status of NFTs as investable securities, which could have made it liable in class action litigation. Earlier this month, US District Judge Denise Casper ruled that a suit against DraftKings could move forward because NFTs fit the bill as securities.
In her decision, Casper ruled that plaintiffs met the standard for the Howey Test, a more than six-decade-old Supreme Court ruling that defined precedent for investment of money, expectation of profits, common enterprise, and investment success dependent upon parties beyond the individual investor.
The suit, which was filed in March 2023 in US District Court in Boston, was brought by Illinois resident Justin Dufoe who claimed he lost $14K on NFTs purchased on DraftKings Marketplace. It’s not clear what the outcome of the trial would have been had the case gone that far, but the gaming company pledged to provide 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 Bit by Bad Timing
DraftKings launched its NFT marketplace in July 2021 as NFT hoopla and prices were soaring. There was some fanfare around the announcement because it included an agreement with Autograph, an NFT collecting platform co-founded by seven-time Super Bowl champion quarterback Tom Brady.
Reignmakers was a fantasy sports game in which participants bought collections of gamified NFT cards via auctions, pack drops, and secondary market transactions, meaning real money was put on the line. Users would build lineups with their acquired NFTs with hopes of winning fantasy games, and that the NFTs would appreciate in value. However, just months after DraftKings Marketplace and Reignmakers were born, NFT prices collapsed, stunting demand for those components of the gaming company’s menu.
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 operated on the Polygon blockchain and Polygon is a digital currency, prices of which also cratered amid the so-called “crypto winter” of 2022.
Closures Could Be Smart Legal Moves
Shuttering what were once potential-rich units isn’t easy for any company, regardless of industry, but in the case of DraftKings Marketplace and Reignmakers, the gaming company may have made a smart legal decision.
Recently, regulators have increased scrutiny on sellers of NFTs, slapping some with fines for selling the tokens without registering them as securities. Last year, a US district judge ruled the NFTs sold on the NBA Top Shot platform qualified as securities, which resulted in a $4 million award for plaintiffs that sued operator Dapper.
In another 2023 case, the Securities and Exchange Commission (SEC) ordered Impact Theory to pay $6.1 million as disgorgement, prejudgment interest, and a civil fine because the commission claimed the manner in which the company sold NFTs was comparable to securities marketing.
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