Why did the SEC issue a $750,000 fine and what does a restaurant have to do with it?

American restaurant Flyfish Club has entered into a settlement agreement with the US SEC in connection with an “unregistered offering of cryptoasset securities.”

Fly Fishing Club Promissory note A $750,000 fine. According to the SEC ruling, between August 2021 and May 2022, Flyfish Club sold around 1,600 nfts to investors. These tokens were supposed to become an exclusive means of obtaining membership in the club.

According to the regulator, the project raised $14.8 million, with the capital going towards financing the construction and launch of a private restaurant, Flyfish Club, intended solely for club members. In addition, 42% of investors purchased several nfts, although only one token is needed to become a member of the club.

“Flyfish engaged in significant marketing efforts that promoted nfts as investments and led investors to expect profits from Flyfish’s efforts.”

Why is the SEC interested?

The regulator argues that these nfts are subject to federal securities laws because token holders can resell them at a higher price and earn passive income by renting them out.

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 order requires Flyfish Club to pay a civil penalty of $750,000 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 insist that Flyfish Club nfts are utility tokens, not securities. They were created to provide access to exclusive dining offerings and not as speculative investment vehicles. Peirce and Uyeda are concerned that the SEC’s intervention could negatively impact nft holders by making their transfer and resale even more difficult.

“Allowing the topic of cryptocurrencies to be addressed in an endless series of misguided and exaggerated cases has been and remains a momentous mistake.”

The commissioners emphasized that nfts are a new tool for chefs and artists to monetize their talents and provide unique experiences that overly restrictive regulatory interpretations should not stifle.

<h2 class="wp-block-heading" id="sec-scares-nft-industry”>SEC scares nft industry

In August, the SEC threatened to sue OpenSea, arguing that collectible tokens traded on OpenSea are securities.

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

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Finzer said the company would defend the rights of digital artists and promised to set aside $5 million to cover the legal costs of any nft developer who might receive a similar notice from the regulator.

Politicizing the SEC's approach

Meanwhile, the SEC continues to face criticism from the crypto community and US lawmakers. In 2022, the agency first turned its attention to nfts, accusing a Los Angeles-based media company of selling unregistered securities via nfts. The case ended with a $6 million settlement.

Following the harassment, the US House of Representatives Subcommittee on Digital Assets, Fintech and Inclusion said that It would be sustained a hearing titled “Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets.”

The subcommittee said SEC Chairman Gary Gensler “prioritized and pursued a regulatory and enforcement 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 any guidance on how it determines whether a digital asset meets the definition of a security. Instead, Chairman Gensler and the SEC have expressed their views publicly.”

They cited inconsistencies with the SEC chairman's position on digital assets as 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 Sept. 18 hearing.

Coinbase joins the fight against the SEC

In September, Coinbase founded legal advocacy group Stand With crypto and launched a Legal Defense Fund to protect nft projects.

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On September 13, Stand With crypto announced a $6 million fund backed by venture giant a16z and nft marketplace OpenSea.

Leading law firms are backing 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 release, a16z contributed $1 million to the Creators Legal Defense Fund, while OpenSea donated $5 million.