On April 25, purchasers of Nike non-fungible tokens (NFTs) filed a class action complaint in the US District Court for the Eastern District of New York against the sportswear giant alleging that the December 2024 shutdown of RTFKT constituted a “brazen rug pull,” resulting in significant monetary losses for the plaintiffs.
The proposed class action alleges that Nike used its iconic brand and marketing prowess to promote RTFKT unregistered securities in violation of federal securities laws under the Howey test at the expense of unsophisticated retail investors. Further, the complaint asserts that the value of the Nike NFTs was closely tied to Nike’s promotional efforts, gamified challenges, and the prospect of exclusive rewards such as limited-edition physical Nike products. With Nike’s promotional efforts coming to an end, the class action plaintiffs have contended that the value of their NFTs has largely evaporated.
RTFKT Background
In December 2021, Nike acquired RTFKT, Inc. (pronounced “artifact”), a brand that created and sold NFTs and associated virtual sneakers and other digital collectibles. The NFTs and their associated digital content could be traded, peer-to-peer, on the secondary market. In addition, Nike created a gamified ecosystem in which the Nike NFTs could be used to complete challenges and quests to reveal rewards and earn prizes, including limited edition, real-life Nike products. According to the complaint, “[t]he prospect of these prizes and rewards, in turn, provided value to the Nike NFTs, stimulating demand, eliciting secondary market trading and, for a time, rising prices.” By 2023, Nike had purportedly earned “tens of millions of dollars” in revenue from Nike NFTs, and secondary market trading of Nike NFTs grew to be over $1 billion.
Nike’s Alleged Rug Pull
On December 2, 2024, RTFKT announced via X that it would be winding down operations in January. While NFT holders can continue to access their NFTs and associated digital content via third-party NFT marketplaces, as well as trade them on the secondary market, Nike indicated it would no longer actively support the RTFKT digital ecosystem. In their complaint, the plaintiffs call this abrupt closure a deceptive “rug pull” — a crypto industry term for a situation in which a promoter profits from and then abruptly shuts a project down, leaving investors with essentially worthless assets.
Unregistered Securities
In addition to the rug pull allegations, the complaint alleges that the Nike NFTs were unregistered securities offered and sold by Nike in violation of federal and state securities and consumer protection laws. Under the Howey test, an investment is a “security” when “(1) the purchaser makes an investment of money or exchanges another item of value (2) in a common enterprise (3) with the reasonable expectation of profits (4) to be derived from the efforts of others.” Issuers of securities must register such securities and file relevant disclosure statements with authorities, including the US Securities and Exchange Commission (SEC).
Although courts have not definitively ruled on whether NFTs are securities, plaintiffs cite recent SEC enforcement actions and cases like SEC v. Stoner Cats 2, LLC to argue that Nike NFTs satisfy the standard and that Nike’s failure to comply with applicable securities laws inflicted significant financial damages upon NFT holders. The plaintiffs are seeking compensation and disgorgement of profits from Nike.
Notably, the RTFKT Terms of Service and End User License Agreements expressly disclaim the possibility that the NFTs sold on the platform were securities and include various other provisions that may pose a challenge to the plaintiffs. For example, the terms require NFT purchasers to represent and warrant that their purchase of an NFT “is solely for your personal collection, use and enjoyment, and not for speculative or investment purposes, for use as a substitute for currency or other medium of exchange, or for resale or redistribution.” The terms also include a class action waiver, mandatory arbitration, and reserve Nike’s right to modify or terminate the RTFKT service at any time. Nike’s response to the complaint is due on May 23.
Next Steps
This lawsuit highlights some of the legal complexities associated with the NFT and digital asset space, particularly for established and high-profile brands that make appealing targets for class action attorneys. Companies seeking to enter into or partner in the digital assets space should carefully evaluate the impact of and obligations imposed by US securities laws and are well advised to develop contingency plans in the event that projects need to be discontinued. Strong terms of use can also play an important role in managing the risk associated with NFT and digital asset projects.
The case is Cheema v. Nike, Inc., 1:25-cv-02305 (EDNY).
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