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American Restaurant Flyfish Club Settles with SEC Over Unregistered Crypto Asset Securities
The Flyfish Club, a renowned American restaurant, has reached a settlement with the U.S. Securities and Exchange Commission (SEC) regarding an “unregistered offering of crypto asset securities.” The restaurant will pay a fine of $750,000. According to the SEC ruling, between August 2021 and May 2022, Flyfish Club sold around 1,600 NFTs to investors. These tokens were intended to serve as exclusive membership access to the club.
The SEC’s Stance on Flyfish Club NFTs
The SEC claims that these NFTs fall under federal securities laws because token holders could resell them at higher prices and earn passive income by renting them out. The project reportedly earned $14.8 million, which was planned to finance the construction and launch of the private restaurant, Flyfish Club, exclusively for club members. Interestingly, 42% of investors bought multiple NFTs, even though only one token was needed for membership.
“Flyfish engaged in significant marketing efforts that promoted the NFTs as investments and led investors to expect profits from Flyfish’s efforts.”
The SEC’s order requires Flyfish Club to pay a civil penalty of $750,000 and destroy all NFTs in the company’s possession within ten days.
Dissent Among SEC Officials
Not all SEC officials agree with the agency’s actions. Former SEC representatives Hester Peirce and Mark Uyeda argue that Flyfish Club’s NFTs are utility tokens, not securities. They were designed to provide access to exclusive dining offers and not as speculative investment vehicles. Peirce and Uyeda are concerned that the SEC’s intervention could negatively impact NFT holders by making them even more difficult to transfer and resell.
“Leaving crypto to be addressed in an endless series of misguided and overreaching cases has been and continues to be a consequential mistake.”
The commissioners emphasized that NFTs are a new tool for chefs and artists to monetize their talents and provide unique experiences that overly restrictive regulatory interpretations shouldn’t stifle.
SEC’s Impact on the NFT Industry
In August, the SEC threatened to sue OpenSea, arguing that the collectible tokens traded on OpenSea are securities. OpenSea CEO Devin Finzer reacted to the SEC’s Wells notice, calling it “regulatory saber-rattling” that ventures into “uncharted territory.” He feared it could backfire and cause creators of NFTs to stop making digital art.
Finzer stated that the company would defend the rights of digital artists and promised to set aside $5 million to cover legal costs for any NFT developers who might receive a similar notice from the regulator.
Political Criticism of the SEC
The SEC continues to face criticism from the crypto community and U.S. lawmakers. In 2022, the agency first turned its attention to NFTs, accusing a Los Angeles-based media company of selling unregistered securities through NFTs. The case ended in a $6 million settlement.
The U.S. House Subcommittee on Digital Assets, Fintech, and Inclusion announced a hearing titled “Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets.”
The subcommittee stated that SEC Chairman Gary Gensler “prioritized and pursued an enforcement and regulatory agenda to the detriment of the digital asset ecosystem” during his tenure. They cited inconsistencies with SEC Chair’s position on digital assets as securities under the Howey test and disagreements among commissioners. Former SEC Commissioner Dan Gallagher and former agency lawyer Michael Liftick are expected to testify at the hearing on September 18.
Coinbase and Stand With Crypto Initiative
In September, Coinbase established the legal advocacy group Stand With Crypto and launched a Legal Defense Fund to protect NFT projects. On September 13, Stand With Crypto announced a $6 million fund backed by venture giant a16z and NFT marketplace OpenSea.
Leading law firms Fenwick & West LLP, Goodwin Procter LLP, and Latham & Watkins LLP will provide critical legal resources to those working in the blockchain and NFT space. According to the statement, a16z contributed $1 million to the Creator Legal Defense Fund, while OpenSea donated $5 million.
