Two commissioners from the U.S. Securities and Exchange Commission (SEC), Hester Peirce and Mark Uyeda, have expressed strong opposition to the agency’s decision to penalize Flyfish Club, an NFT-themed restaurant, with a $750,000 settlement. The SEC’s action targeted Flyfish for allegedly conducting an unregistered offering of crypto asset securities through the sale of non-fungible tokens (NFTs).
The Flyfish Club Settlement
According to a cease-and-desist order issued on September 16, Flyfish Club sold 1,600 NFTs to U.S. investors, generating $14.8 million from two different price points. The SEC argued that Flyfish’s NFT sales constituted an unregistered offering of securities, thus violating U.S. securities laws.
However, Peirce and Uyeda, in a dissenting statement, disagreed with the enforcement action, arguing that the Flyfish NFTs merely functioned as a novel way to offer memberships. They insisted that the NFTs did not meet the criteria of securities under U.S. law.
Criticism of SEC’s Approach
The commissioners emphasized that the SEC’s enforcement could stifle innovation in the NFT space. Peirce and Uyeda urged the agency to provide clearer guidance for NFT projects and allow more room for experimentation without the constant threat of legal action.
“Creative people should be able to experiment with NFTs without having to consult a high-priced tea-leaf reader—ahem, lawyer,” the commissioners said in their dissenting letter. They further criticized the action as unnecessary, pointing out that the Flyfish NFTs posed no direct harm to investors.
This type of enforcement, they argued, undermines trust in what they referred to as “Chef SEC,” adding a touch of humor to highlight their frustration with the agency’s aggressive stance toward NFTs.
The Howey Test Debate
The SEC justified its enforcement by claiming that the Flyfish NFTs met the four prongs of the Howey test, which is used to determine whether an asset qualifies as a security. The Howey test examines whether there is an investment of money in a common enterprise with the expectation of profit derived from the efforts of others.
While Flyfish did not admit or deny the SEC’s allegations, it agreed to settle. As part of the agreement, Flyfish will destroy any remaining NFTs in its possession and will not receive future royalties from secondary market sales of the NFTs.
Broader Implications for the NFT Space
This is not the first time the SEC has taken action against NFT projects. In recent months, the agency has targeted several others, including Impact Theory and Stoner Cats 2. Additionally, the SEC issued a Wells Notice to one of the largest NFT marketplaces, OpenSea, in August, signaling potential enforcement action.
The Flyfish NFTs were part of a venture led by entrepreneur Gary Vaynerchuk, who gained prominence during the NFT boom in 2021. Vaynerchuk, known for his expertise in both NFTs and hospitality, designed the Flyfish NFTs to provide holders with access to a yet-to-be-opened restaurant in Manhattan.
