Why the SEC issued a $750k fine and what does a restaurant have to do with it

American restaurant Flyfish Club has signed a settlement agreement with the U.S. Securities and Exchange Commission (SEC) regarding its “unregistered crypto asset securities offering.”

Flyfish Club to pay $750,000 fine. According to the SEC ruling, Flyfish Club sold approximately 1,600 NFTs to investors between August 2021 and May 2022. These tokens were supposed to be a special way to become a member of the club.

According to the regulator, the project raised $14.8 million, and the capital was planned to finance the construction and launch of Flyfish Club, an exclusive restaurant for club members only. Also, 42% of investors purchased several NFTs, but only one token is required to become a club member.

“Flyfish has engaged in significant marketing efforts promoting NFTs as investments and ensuring that investors expect to profit from Flyfish’s efforts.”

Why is the SEC interested?

The regulator argues that these NFTs fall under federal securities laws because token holders can earn passive income by reselling and renting them for a higher price.

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 $750,000 penalty 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 argue that Flyfish Club’s NFTs are utility tokens, not securities. They were created to provide access to special meal deals, not as speculative investment vehicles. Peirce and Uyeda worry that the SEC’s intervention could negatively impact NFT owners by making it harder to transfer and resell.

“Leaving crypto to be subject to a series of misguided and overreaching lawsuits was, and continues to be, a mistake with consequences.”

The commissioners emphasized that NFTs are a new tool for chefs and artists to monetize their talents and deliver unique experiences that should not be hindered by overly restrictive regulatory interpretations.

SEC is scaring the NFT industry

The SEC threatened to sue OpenSea in August, arguing that collectible tokens traded on OpenSea were securities.

OpenSea CEO Devin Finzer responded to the SEC’s Wells notice, calling it “regulatory saber-rattling” that ventures into “uncharted territory.” He feared it could backfire and cause NFT creators to stop making digital art.

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

We are surprised that the SEC would take such a sweeping action against creators and artists. But we are ready to stand up and fight.

Cryptocurrencies have long been…

— Devin Finzer (dfinzer.eth) (@dfinzer) August 28, 2024

Finzer said the company will defend the rights of digital artists and pledge to allocate $5 million to cover the legal costs of any NFT developer who might receive a similar notice from the regulator.

Politicization of the SEC’s approach

Meanwhile, the SEC 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 resulted in a $6 million settlement.

Following the harassment incidents, the U.S. House of Representatives Subcommittee on Digital Assets, Fintech and Inclusion announced that it will hold a hearing titled “Dazed and Confused: The Details of the SEC’s Policy 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 Chairman Gensler’s tenure, the SEC has not issued guidance on how the SEC determines whether a digital asset meets the definition of a security. Instead, Chairman Gensler and the SEC have made their views public.”

They argued that there were inconsistencies in the SEC Chairman’s position on whether digital assets should be considered securities under the Howey test and disagreements among commissioners.

Former SEC Commissioner Dan Gallagher and former agency attorney Michael Liftick are expected to testify at the hearing on September 18.

Coinbase joins the fight against the SEC

Coinbase launched a legal advocacy group called Stand With Crypto in September and launched a Legal Defense Fund to protect NFT projects.

Stand With Crypto announced a $6 million round of funding on September 13, backed by venture giant a16z and NFT marketplace OpenSea.

Leading law firms are supporting the fund: 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 has contributed $1 million to the Creator Legal Defense Fund, while OpenSea has donated $5 million.