SEC Internal Discord on NFTs – $750K Fine for Flyfish Club Triggers SEC Commissioners

• The SEC issued a $750K fine to Flyfish Club, which sold $14.8M worth of NFTs as memberships for its upcoming restaurant.
• Two SEC commissioners criticized the SEC's action, claiming Flyfish Club hadn't triggered any securities laws, and the NFTs were utility-based (access to the restaurant).
• The current situation shows cracks in the SEC's foundation, as internal discord is eroding the agency.

Is the SEC crumbling from the inside? That's a legit question, as thelatest NFT fine created some internal conflictwithin the agency.

Flyfish Club, an upcoming restaurant, sold NFTs as client memberships, raising over $14.8M. This triggered the SEC, who identified the NFTs as unregistered securities and demanded a $750K fine in civil penalties.

Two commissioners criticized the agency for its heavy-handed stance on NFT creators, claiming the SEC is stifling innovation. They also said Flyfish Club didn't trigger securities laws, and the fine was undeserved.

Are we about to witness the SEC coming apart, especially after the Coinbase situation? Could this be good news for the crypto industry, and will securities laws turn more permissive? Let's find out.

Flyfish Club $750K Fine - What Happened?

Here's a summary of the Flyfish Club situation:

• Between August 2021 and May 2022, Flyfish sold 1,600 NFTs to the public and US investors.
• The NFTs were priced at 2.5 $ETH (~$8,400) and $4.25 $ETH ($~14,300).
• Buyers received an Omakase' membership granting access to a members-only restaurant.
• Flyfish raised $14.8M from the NFT sale.

The SEC considered the NFTs as investment contracts under the Howey test. They also issued a $750K fine for conducting an unregistered offering of crypto securities.

Flyfish Club agreed to the fine and the demand to destroy the NFTs within ten days. They also issued no comments about the case. The company also needs to deny further NFT royalties from secondary market trading platforms.

SEC Ruling - Undeserved and Unjustified?

Two SEC commissioners (Hester Peirce and Mark Uyeda) slammed the SEC's ruling on Flyfish Club, saying that the company hadn't triggered security laws.

In our view, the NFTs here are utility tokens, not securities, and statements by the founders and NFT purchasers that a successful restaurant would cause the NFT price to rise do not change that. [...] The Flyfish NFTs were simply a different way to sell memberships. [...] The intent of a buyer cannot transform a non-security into a security.Hester Peirce and Mark Yeda, SEC Commissioners

The commissioners clarified that Flyfish Club's intention was utility-based - offering buyers access to their restaurant, Omakase.

In all respects, the NFTs were memberships, not assets to be traded and profited from.

Peirce and Uyeda also claim that NFT holders reasonably expected the NFT to provide them with a heightened culinary experience, instead of market resale value.

The keyword here is reasonably.'

Clearly, some holders could (and would) sell the NFTs for profit. But as the duo rightfully states, what an NFT holder does with the asset shouldn't change an NFT's status. Despite what holders did with the memberships, they were still restaurant memberships.

Uyeda and Peirce ended on a strong note, claiming that the SEC should refrain from stifling NFT innovation. Creativity and freedom to experiment are instrumental to helping the industry develop in a healthy direction.

Looking Back - Will the SEC Change Gears?

Let's make one thing clear - the SEC remains a thorn in the side of crypto development for now. The current case doesn't change that.

But it does show the cracks in the wall. The agency is no longer unified under the same banner, and even SEC commissioners are starting to realize the truth, that the SEC needs to change.

Crypto is here to stay, and while regulations are necessary, they can stifle progress and innovation in an industry that essentially runs on them.

References

• Omakase: Statement on In the Matter of Flyfish Club, LLC (SEC)
• SEC Ruling in the Flyfish Club Case (SEC)

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