Earlier today, the Securities and Exchange Commission (SEC) issued an Administrative Order punishing the FlyFish Club (FFC) for allegedly issuing “crypto asset securities.”
The FlyFish Club is a private dining venue that offers memberships similar to country clubs. Unfortunately, FFC upset the Commission by issuing memberships as NFTs that could be transferred without dealing with Club management.
Commissioners Hester Peirce and Mark Uyeda, dissenting Republican voices on the SEC’s decision to discipline FFC, issued a statement lambasting the “crypto-obsessed commission” for its actions. The Commissioners explained:
“Flyfish Club, a dining club, sold NFTs—unique digital tokens recorded on a blockchain—as the exclusive way to access a yet-to-be-built restaurant and bar. Flyfish NFT owners will be eligible to eat in the restaurant, which is scheduled to open soon (though they will still have to pay for their food and drink). A pricier Omakase NFT qualifies owners to eat in the more exclusive Omakase room. Flyfish and Omakase NFT owners can lease or sell their NFT—and thus their membership—to someone else. The Flyfish Club received royalties for many of the secondary sales and earned $2.7 million in such royalties. Flyfish created approximately 3,000 NFTs, of which it sold slightly more than half at $8,400 for the regular NFTs and $14,300 for the Omakase NFTs, for aggregate proceeds of $14.8 million. Flyfish Club held on to the remaining NFTs for future distribution. According to an interview with a Flyfish principal that was excerpted in the order, the intent behind Flyfish’s utility-based NFT project was to “build a large business around this with multiple clubs, ancillary offerings, other social experiences, pop-up events, and build a whole world around Flyfish Club.” That is to say, the social experiences were at the heart of the Flyfish venture.”
Unfortunately for the Club the Commission did not like the new business concept. While there were no allegations of fraud or harm, the regulator declared that NFT memberships were securities according to the Howey Test. The Order states, “Investors in Flyfish NFTs had a reasonable expectation of obtaining future profits based on the managerial and entrepreneurial efforts of Flyfish and its principals.”
Commissioners Peirce and Uyeda describe the application of securities law in this situation as harmful both today and in the future, establishing a dicey precedent. “Experiments like Flyfish Club are not a threat to the American investor.”
So where does the Commission draw the line? Apparently, there isn’t one. Perhaps they will start gunning for equity ownerships at the local golf clubs.
Meanwhile, FFC must pay the SEC civil penalties of $750,000 while promising not to go the NFT/crypto path again.
