The U.S. Securities and Exchange Commission (SEC) has issued an order against Flyfish Club, LLC for conducting an unregistered offering of crypto asset securities through the sale of non-fungible tokens (NFTs). Flyfish, based in New York City, raised approximately $14.8 million by selling around 1,600 NFTs between August 2021 and May 2022. The NFTs were intended to fund the construction and operation of a members-only restaurant called “Flyfish Club.”
According to the SEC, the Flyfish NFTs were marketed as investment contracts, allowing buyers to resell them at potentially appreciated values. Investors were also told they could generate passive income by leasing the NFTs. Flyfish allegedly failed to register the NFTs as securities, in violation of Sections 5(a) and 5(c) of the Securities Act of 1933.
The SEC’s order mandates that Flyfish cease and desist from future violations, pay civil penalties totaling $750,000, and destroy all NFTs in its possession within ten days. Flyfish has also agreed to assist the SEC in distributing relief to affected investors.
This action highlights the SEC’s increasing focus on the regulation of NFTs as securities when marketed as investment opportunities(33-11305).
SEC Commissioners Hester Peirce and Mark T. Uyeda say “overreach”
SEC Commissioners Hester Peirce and Mark T. Uyeda expressed sharp dissent regarding the agency’s enforcement action against Flyfish Club, LLC for its sale of non-fungible tokens (NFTs). In a joint statement titled “Omakase: Statement On In The Matter Of Flyfish Club, LLC,” the commissioners criticized the SEC’s decision to classify the utility-based NFTs as securities.
“For curmudgeonly commissioners like us, crypto enforcement feels a bit like a trip to a restaurant for a meal, Omakase style. Omakase translates to, “I’ll leave it up to you.” This directive is wonderful in the hands of a renowned chef, but disastrous in the hands of a crypto-obsessed Commission. Leaving crypto to be addressed in an endless series of misguided and overreaching cases has been and continues to be a consequential mistake. By its very nature, Omakase dining requires a deep level of trust. Americans should be able to extend a similar trust to our regulators. Today’s settled enforcement action with Flyfish Club for its sale of non-fungible tokens (“NFTs”) is just the latest dish that undermines trust in Chef SEC. Accordingly, we dissent,” said the letter of dissent.
Peirce and Uyeda argued that Flyfish’s NFTs were designed as membership tokens for a yet-to-open exclusive dining club, with no allegations of fraud in the SEC’s findings. Flyfish Club raised $14.8 million through the sale of NFTs, which offered access to its dining and Omakase experiences, including resale and leasing options. The dissenting commissioners contended that these NFTs were utility tokens, not securities, as they offered tangible benefits rather than being primarily investment vehicles.
They criticized the SEC’s broad application of the Howey test, which deems investment contracts as securities when there is an expectation of profit based on others’ efforts. Peirce and Uyeda argued that Flyfish NFTs provided real utility—exclusive dining access—and that the mere potential for resale profit should not automatically trigger securities regulation. They further questioned whether the SEC’s intervention would ultimately harm Flyfish Club members by complicating the sale of their memberships.
“The Commission, with the many demands on its time and resources, inexplicably has decided to focus on membership in an exclusive dining club. This case is not one in which the Commission alleges fraud; it finds only that Flyfish Club should have registered its sale of membership NFTs as securities transactions.
“In our view, the NFTs here are utility tokens, not securities, and statements by the founders and NFT purchasers that a successful restaurant would cause the NFT price to rise do not change that. While a member potentially could earn a profit by leasing or selling her token, the NFT has a concrete use: you need it to eat at the Flyfish Club. The Order slaps the Howey label on these NFTs because “Investors in Flyfish NFTs had a reasonable expectation of obtaining future profits based on the managerial and entrepreneurial efforts of Flyfish and its principals.”
To the contrary, Howey is inapt because holders of Flyfish NFTs had a reasonable expectation of obtaining in the future wonderful culinary experiences and other exclusive membership experiences based on the managerial and entrepreneurial efforts of Flyfish and its principals. Whether their expectations will be met should not be judged by a securities regulator. Might someone who moved out of the area or moved on to a new phase of life decide to sell her membership? Sure. And might—as the Order states—many purchasers have purchased the NFTs with speculative intent? Sure. A well-known artist who sells a limited set of numbered prints may be selling to a couple who wants to display her art in their home, or to someone who wants to turn around and sell it for a profit and is making a bet on the artist’s future. The intent of a buyer cannot transform a non-security into a security. Will Flyfish Club members really be better off now that the Commission is making it much harder to sell their memberships?”, the SEC Commissioner questioned.
The commissioners also expressed concern over the impact on creativity and innovation, stating that NFTs offer new opportunities for creators to monetize their talents. They urged the SEC to provide clear guidance rather than overreaching regulation, allowing creators and businesses to experiment with NFTs without fear of enforcement action.
“The securities laws are not needed here, and their application is harmful both in the present case and as future precedent. The Flyfish NFTs were simply a different way to sell memberships. Why shouldn’t a chef be able to sell memberships to eat at her kitchen table and to collect royalties on resales of those memberships? NFTs offer a promising way to allow creative people—such as chefs, musicians, or visual artists—to monetize their talent and a potentially efficient way for selling access to experiences and communities. Experiments like Flyfish Club are not a threat to the American investor. Creative people should be able to experiment with NFTs without having to consult a high-priced tea-leaf reader—ahem, lawyer. The Commission can change its menu to include a healthy serving of guidance to give non-securities NFT creators the freedom to experiment.”
The securities laws are not needed here, and their application is harmful both in the present case and as future precedent. The Flyfish NFTs were simply a different way to sell memberships. Why shouldn’t a chef be able to sell memberships to eat at her kitchen table and to collect royalties on resales of those memberships? NFTs offer a promising way to allow creative people—such as chefs, musicians, or visual artists—to monetize their talent and a potentially efficient way for selling access to experiences and communities. Experiments like Flyfish Club are not a threat to the American investor. Creative people should be able to experiment with NFTs without having to consult a high-priced tea-leaf reader—ahem, lawyer. The Commission can change its menu to include a healthy serving of guidance to give non-securities NFT creators the freedom to experiment.
Their dissent concluded with a critique of the SEC’s approach to NFTs, comparing it to a poorly executed “Omakase” meal—highlighting the dangers of leaving crypto enforcement to regulators without providing clear and sensible direction.
