Flyfish Club, a U.S.-based restaurant, recently reached a settlement with the Securities and Exchange Commission (SEC) for an “unregistered offering of crypto asset securities.” As part of the agreement, Flyfish Club will pay a $750,000 penalty.
Between August 2021 and May 2022, Flyfish Club sold around 1,600 NFTs to investors, promising these tokens would grant exclusive membership to the restaurant. The SEC found that the restaurant generated $14.8 million from the NFT sales, which was intended to fund the establishment of the private, members-only Flyfish Club. Interestingly, 42% of investors purchased multiple NFTs, despite only needing one to become a club member.
The SEC took issue with the marketing of these NFTs, stating that Flyfish promoted them as investment opportunities, encouraging buyers to expect profits from future sales or even passive income through renting out the tokens.
Why the SEC Took Action
The SEC classified the Flyfish NFTs as securities, arguing that they met the criteria under federal securities laws. Investors had the potential to resell them for a higher price or generate income through rentals. As a result, the SEC determined that Flyfish Club violated Sections 5(a) and 5(c) of the Securities Act of 1933 by failing to register the NFTs as securities.
The SEC’s order mandates that Flyfish Club not only pay the fine but also destroy any remaining NFTs in its possession within ten days. Despite this ruling, there was some internal disagreement within the SEC.
Diverging Opinions Within the SEC
Former SEC commissioners Hester Peirce and Mark Uyeda opposed the agency’s decision, arguing that the Flyfish NFTs should be classified as utility tokens, not securities. They emphasized that the NFTs were intended to provide access to exclusive dining experiences rather than serving as speculative investment vehicles. Peirce and Uyeda cautioned that the SEC’s regulatory actions could have unintended consequences, making NFT transfers and resales even more challenging for holders.
“Continuing to regulate crypto through a series of piecemeal and overreaching cases is a significant mistake,” they said, warning that restrictive interpretations could hinder innovation in the NFT space.
The SEC’s Broader Impact on the NFT Industry
This case comes as part of a broader trend of increased SEC scrutiny in the NFT and crypto sectors. In August, the SEC issued a Wells notice to OpenSea, one of the largest NFT marketplaces, suggesting that many of the tokens traded on the platform qualify as securities.
OpenSea’s CEO, Devin Finzer, labeled the SEC’s actions as “regulatory saber-rattling,” and expressed concern that this could discourage NFT creators from producing digital art. To defend the rights of digital artists, Finzer announced a $5 million fund to cover legal expenses for NFT developers facing similar legal threats.
This unfolding regulatory landscape is creating uncertainty in the NFT market, with some fearing that increased scrutiny could stifle innovation while others believe it's necessary to ensure investor protection.