SEC Commissioners Challenge Securities Regulation in Flyfish NFT Case

By: Isha Das

SEC Commissioners Hester M. Peirce and Mark T. Uyeda have criticized the regulator's enforcement action against the Flyfish Club non-fungible token (NFT) collection. In a letter dated Sept. 16, the commissioners argued that securities laws were not applicable in this instance.

Flyfish Club, a dining establishment, sold NFTs that offered exclusive access to a future restaurant and bar. Approximately 3,000 NFTs were created, with over half being sold at $8,400 for regular NFTs and $14,300 for Omakase NFTs, raising $14.8 million. Additionally, the club earned $2.7 million in secondary sales royalties.

The SEC charged Flyfish Club with conducting an unregistered offering of crypto asset securities in the form of NFTs. The case was settled with a $750,000 civil penalty and a commitment by Flyfish Club to comply with a cease-and-desist order.

The commissioners stated, "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."

Peirce and Uyeda further argued that these NFTs were utility tokens rather than securities. They emphasized that the Howey Test, used to determine if an asset is a security, was inappropriate for Flyfish NFTs as holders had reasonable expectations of obtaining in the future “wonderful culinary experiences” and other exclusive membership experiences related to Flyfish.

The commissioners warned that applying securities laws in this case could harm both the present case and future precedents. They called for the SEC to provide clearer guidance to non-securities NFT creators, allowing room for innovation without legal uncertainty.

SEC Crackdown on NFTs

The SEC recently threatened the NFT marketplace OpenSea with a Wells Notice on Aug. 28 for allegedly offering securities on its platform.

This action, which precedes a potential enforcement effort, has significant implications for the broader NFT market. Devin Finzer, CEO of OpenSea, commented that the regulator's move impacts creators and artists, asserting that the company would “stand up and fight.”

In response, the Coinbase-backed organization Stand With Crypto Alliance launched a $6 million Creator Defense Fund aimed at protecting artists affected by the SEC's enforcement actions.