Due to ongoing legal challenges, DraftKings has been forced to shut down their Reignmakers fantasy sports marketplace. A federal judge has ruled that DraftKings’ NFTs are unregistered securities. In the crypto space, an unregistered security is any tradable asset that does not comply with the SEC’s regulations.
Criteria for an asset to be considered an unregistered security
The SEC applies the Howey test to determine whether an asset qualifies to be sanctioned under SEC rules. The Howey test examines whether there is an investment of money, an expectation of profits, the investment of money in a common enterprise and whether any profit comes from the efforts of a third party. If the Howey test is followed correctly, securities should be registered to protect investors from fraudulent activities and require financial disclosures.
Requirement for registration with the SEC and consequences of non-compliance
If a security passes certain criteria, it is forced to be registered with the federal agency as a registered security. Registration demands full disclosure, and failing to do so would render it unregistered, violating the US Securities Exchange Act. This protects investors and individual buyers, safeguarding against illicit activities such as sudden changes and token collapse, like rug pulls. This class action lawsuit alleges that the money customers invested in the Reignmakers marketplace is classified as registered securities, contrary to DraftKings’ implication that they weren’t. This changes the financial responsibilities DraftKings has with the NFT marketplace.
The lawsuit follows a previous suit from last month against Dapper Labs, the company behind the National Basketball Association’s Top Shot. Top Shot is a platform for digital collectible NFTs featuring NBA highlights from various teams and players. The company agreed to a $4 million settlement with disgruntled NFT holders due to issues related to an unregistered securities offering.
Impact on the NFT market and Recent sales volume
The NFT market is experiencing a downturn, with this past month’s sales volume reaching yearly lows. DraftKings has decided to shut down the Reignmakers NFT marketplace due to ongoing legal action against them. Many customers are unhappy because the cash payout for their NFTs may not be as much as they originally paid, which could negatively impact their future gaming marketplace experiences.
