American Restaurant Flyfish Club Settles with SEC Over Unregistered NFT Offering

Flyfish Club will pay a $750,000 fine and destroy all NFTs in the company's possession within ten days.

American restaurant Flyfish Club has agreed to pay a $750,000 fine to the U.S. SEC for an “unregistered offering of crypto asset securities.”

According to the SEC ruling, between August 2021 and May 2022, Flyfish Club sold around 1,600 NFTs to investors. These tokens were supposed to become an exclusive means of obtaining membership in the club. The project earned $14.8 million, which was planned to finance the construction and launch of a private restaurant, Flyfish Club, intended only for club members.

The regulator argues that these NFTs fall under federal securities laws because token holders can resell them at a higher price and earn passive income by renting them out. Based on these findings, the agency said Flyfish Club violated Sections 5(a) and 5(c) of the Securities Act of 1933 by failing to register the collectible tokens as securities. 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.

However, not all SEC officials agree with the agency’s actions. Former SEC representatives Hester Peirce and Mark Uyeda insist that Flyfish Club’s NFTs are utility tokens, not securities. They were created 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.

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's venturing into “uncharted territory”. He feared it could backfire and cause creators of NFTs to stop making digital art.

OpenSea has received a Wells notice from the SEC threatening to sue us because they believe NFTs on our platform are securities.

We're shocked the SEC would make such a sweeping move against creators and artists. But we're ready to stand up and fight.

Cryptocurrencies have long…

Finzer said 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.

The SEC, meanwhile, 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.

In the wake of the harassment, the U.S. House Subcommittee on Digital Assets, Fintech, and Inclusion said it would hold a hearing titled “Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets.”

The subcommittee said SEC Chairman Gary Gensler “prioritized and pursued an enforcement and regulatory agenda to the detriment of the digital asset ecosystem” during his tenure on the panel.

“During Chair Gensler’s tenure, the SEC has not released guidance on how the SEC determines whether a digital asset meets the definition of a security. Rather, Chair Gensler and the SEC have publicly opined.”

They cited inconsistencies with the 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 Sep. 18.

Coinbase founded the legal advocacy group Stand With Crypto and launched a Legal Defense Fund to protect NFT projects.

Today, we raise our shield to protect a foundational part of the crypto community.

Alongside @opensea & @a16zcrypto, we are launching a $6m legal defense fund for NFT creators.

Creatives can now stand up to misguided actions from the SEC.

Learn more: https://t.co/8fc2YEQs80 pic.twitter.com/dmOtoN3gbi

On Sep. 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.