SEC Commissioners Hester M. Peirce and Mark T. Uyeda have raised concerns over the Securities and Exchange Commission’s (SEC) enforcement action against the Flyfish Club non-fungible token (NFT) collection. In a letter dated Sept. 16, the commissioners argued that securities laws should not apply in this particular case.
The Flyfish Club, which operates as a dining establishment, sold NFTs that granted exclusive access to a future restaurant and bar. The club minted about 3,000 NFTs, selling over half of them at $8,400 for regular NFTs and $14,300 for Omakase NFTs, raising a total of $14.8 million. In addition, the club earned $2.7 million in secondary sale 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 to comply with a cease-and-desist order.
In their dissent, Peirce and Uyeda argued that the NFTs in question should be classified as utility tokens, not securities. They pointed out that the Howey Test, typically used to determine if an asset is a security, is not applicable to Flyfish NFTs as their holders had reasonable expectations of receiving exclusive culinary experiences and other membership perks related to Flyfish in the future.
The commissioners expressed concerns that applying securities laws in this case could set a harmful precedent and create legal uncertainty for non-securities NFT creators. They called on the SEC to provide guidance to allow for experimentation in the NFT space without the fear of facing regulatory repercussions.
The SEC’s crackdown on NFTs has extended to the popular marketplace OpenSea, which received a Wells Notice on Aug. 28 for allegedly offering securities on its platform. This notice serves as a warning from the SEC that enforcement action may follow if the company fails to address the regulator’s concerns.
Devin Finzer, CEO of OpenSea, has vowed to fight back against the SEC’s allegations, stating that the regulator’s actions impact creators and artists. In response to the potential threat posed by the SEC, the Coinbase-backed organization Stand With Crypto Alliance has launched the Creator Defense Fund, a $6 million initiative aimed at protecting artists affected by regulatory enforcement actions in the NFT space.