Facing a lawsuit from the NFL Players Association, DraftKings unexpectedly admits that NFTs are securities by 'retreating' from the industry?

Recently, the NFL Players Association (NFLPA) accused the digital sports entertainment and gaming company DraftKings of evading its payment obligations under the NFT player license agreement. After abandoning the NFT business, DraftKings, which faced a class-action lawsuit for allegedly selling unregistered securities, found itself in another lawsuit.
Interestingly, in the dispute with the NFLPA, DraftKings' stance seems to have shifted from denial to actively acknowledging that 'NFTs are securities.'
In late July this year, DraftKings stated in an email to users: 'After careful consideration, DraftKings has decided to terminate Reignmakers and our NFT marketplace, effective immediately. This decision was not made lightly, and we believe it is the right course of action.'
DraftKings' NFT marketplace was launched in August 2021, with the company's co-founder Matt Kalish revealing that part of the motivation for launching the NFT business came from the success of the NFT series NBATopShot at that time. With a ready-made success story, DraftKings chose to 'template' and directly secured licenses from the NFL, the first of the four major professional sports leagues in North America, and some other top athletes, providing users with digital collectibles themed around these athletes on the Polygon blockchain.
During the peak of the NFT craze, DraftKings' NFT strategy quickly became successful. Its platform released 116 NFT collectibles in about six months, with total sales revenue reaching $44 million, with the first batch of Tom Brady-themed NFT series selling out immediately upon release.
As the hype faded, like other NFT platforms, DraftKings also faced legal troubles. In March 2023, DraftKings faced a class-action lawsuit, alleging that DraftKings' NFTs constituted investment contracts and should be regulated as securities under federal law. DraftKings argued that its NFTs are not securities and attempted to dismiss the case by filing a motion to dismiss the class action. On July 2nd this year, a federal judge in Massachusetts rejected DraftKings' motion. In a 24-page ruling, the court pointed out that the plaintiffs had sufficient grounds to allege that DraftKings' NFTs met the Howey test's legal definition of investment contracts.
The court also distinguished this case from the Dapper Labs case involving NBATopShot developers, stating that DraftKings actually created a playable fantasy sports game through its Reignmakers product. However, since Reignmakers was launched several months after the initial NFT sale, this does not negate the reasonable allegation of investment intent.
After deciding to abandon the NFT business, DraftKings also decided not to fulfill its agreement with the NFLPA and informed them that payments would cease from July 30th onwards. Upon hearing this, the NFLPA immediately filed a lawsuit seeking compensation for 'anticipated breach.' The lawsuit also highlighted that the total compensation for the company's five executives since 2021 amounted to $261 million and stated that these compensations were about four times what they owed the NFLPA licensors. Calculations show that the NFLPA is seeking approximately $65 million from DraftKings.
When canceling the agreement, DraftKings emphasized a clause in the contract that allowed for the termination of transactions 'in the event that government, regulatory, or judicial authorities 'determine' that NFTs constitute 'securities.' DraftKings believes that the Massachusetts court's rejection of its motion is evidence of this situation.
On the other hand, the NFLPA stated that the court's ruling did not determine that NFTs are securities. Their lawyer pointed out, 'The motive behind DraftKings' decision to refuse to continue fulfilling the licensing agreement with the NFLPA is simple: the once-hot NFT market has cooled off.' He added, 'Despite DraftKings' best efforts to obfuscate, ultimately, this case is very simple. DraftKings cannot commercialize and profit from its licensed intellectual property, which cannot be an excuse for not fulfilling its obligations. DraftKings must pay the due fees.'
Flow blockchain and NBA Top Shot developer Dapper Labs were sued in 2021 for allegedly selling NFTs as unregistered securities. After a lengthy litigation process, they reached a settlement agreement with the plaintiffs and paid $4 million, with the plaintiffs waiving their future claims that Top Shot NFTs are securities.
However, the controversy over whether NFTs are unregistered securities remains. Recently, the NFT marketplace OpenSea received a Wells notice from the U.S. SEC, which believes that the NFTs on the platform may fall under the category of securities, threatening to sue OpenSea. OpenSea believes that NFTs are fundamentally creative goods and should not be regulated under securities laws. They have pledged to provide $5 million to help NFT creators and developers who received Wells notices pay legal fees and vowed to defend the industry's interests.
For DraftKings, which has exited the NFT industry, admitting that NFTs are unregistered securities and once again learning from its 'template' NBA Top Shot to offer some compensation to the class-action lawsuit may be a more cost-effective deal than the multimillion-dollar compensation to the NFLPA.The collective lawsuit surrounding DraftKings is currently entering the investigation stage, and its outcome may serve as a precedent for whether NFTs will ultimately be considered securities, impacting future litigations.