• SEC scrutiny increases on NFTs, raising industry concerns.

  • Flyfish NFTs deemed securities; $750,000 SEC settlement enforced.

Two U.S. Securities and Exchange Commission (SEC) commissioners have expressed dissent over their agency’s $750,000 settlement with Flyfish Club, a restaurant using non-fungible tokens (NFTs) to sell memberships. The SEC’s Sept. 16 order stated Flyfish conducted an unregistered sale of crypto asset securities by offering 1,600 NFTs, raising $14.8 million.

SEC commissioners Hester Peirce and Mark Uyeda sharply criticized the enforcement. They argued that the Flyfish NFTs were merely innovative membership sales rather than investment contracts. They contended that the NFTs, designed to provide exclusive dining access, didn’t meet the Howey Test’s criteria for securities.

Moreover, in a joint statement, Peirce and Uyeda said Flyfish’s NFT offering didn’t threaten investors and urged the SEC to give NFT creators more freedom to experiment. “Creative people should be able to experiment with NFTs without having to consult a high-priced tea-leaf reader—ahem, lawyer,” they wrote.

Some thoughts on NFTs being on the enforcement menu at the SEC: https://t.co/jw2trhSIo3 Order is here: https://t.co/R5gQUblatD

— Hester Peirce (@HesterPeirce) September 16, 2024

Industry Criticism

Flyfish Club, led by entrepreneur Gary Vaynerchuk, is set to open in New York this month. The NFTs granted holders exclusive access to the yet-to-be-built restaurant’s facilities, including dining and lounge areas.

The SEC argued Flyfish NFTs were investment contracts, requiring registration under U.S. securities laws, as they could be resold for profit and potentially leased for passive income. As part of the settlement, Flyfish agreed to destroy remaining NFTs in its possession and forfeit future royalties.

The SEC’s decision follows similar enforcement actions against NFT projects Impact Theory and Stoner Cats 2, as well as a Wells Notice issued to NFT marketplace OpenSea. The cases highlight growing scrutiny of digital assets under SEC Chair Gary Gensler’s leadership. This is amid increasing industry criticism of the agency’s regulatory approach.

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