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Crypto Mom & Uyeda Defend Flyfish Club NFTs as Utilities
NFTs | Sep 20, 2024
Image: Freepik
SEC Commissioners Peirce and Yueda Disagree with Flyfish Club NFT Enforcement Case
The U.S. Securities and Exchange Commission (SEC) announced an enforcement action against Flyfish Club, a company that offered NFT memberships for a private dinner experience. Two SEC commissioners, Hester Peirce and Mark Uyeda, publicly disagreed with the ruling saying that the Flyfish NFTs were incorrectly categorized as securities. The case has garnished a lot of attention including in Canada where NFT regulation is still a topic of interest.
Flyfish Club's NFT Offering
Flyfish Club is a high-end exclusive eating club in New York City that sold membership NFTs as the only way to access their restaurant. There were two types of NFTs: A standard NFT for general access to the restaurant club, and an 'Omakase' NFT offering access to a special private sushi dining room. Between 2021-2022, Flyfish Club sold $14.8 million of NFTs to holders who were allowed to resell or lease their tokens, which triggered the SEC to classify the NFTs as securities investments. The SEC argued that the Flyfish NFTs should have been registered as securities because the tokens were sold with the expectation of profit from secondary market sales and royalties.
Peirce and Uyeda Criticize the SEC’s Decision
Peirce and Uyeda strongly disagreed with the SEC's decision saying that the Flyfish NFTs were utility tokens and not securities since they were designed to provide access to a dining experience.
See: Two Artists Sue SEC for NFT legal Showdown
- Smells like 'regulatory overreach'. The two commissioners argued that the SEC's focus should be on cases involving fraud or blatant breaches of securities laws, and not innovative projects that sell membership access. The Flyfish NFTs were access tokens and the SEC overreached.
- Utility vs. Security: They emphasized that a product's potential resale value does not always qualify it as a security, and that the Flyfish NFTs offered utility. Peirce and Uyeda believe the SEC incorrectly applied the Howey Test, which determines whether a transaction constitutes an investment contract.
- Stifle Innovation: The commissioners expressed concern that the SEC is stifling NFT innovation, and that utility access NFTs are a tool for creators (i.e, chefs, artists, entrepreneurs) to monetize access to unique experiences or content.
Implications for Canada
NFT regulation in Canada is still a work-in-progress but the Flyfish Club NFT case raises serious issues about how Canadian regulators should approach and handle NFTs that are merely selling access to events or memberships.
See: Dapper Labs Settles NFT Lawsuit, Signs of Regulation?
Imagine if an event organizer that sold NFT tickets to VIP access to network with speakers was slapped with securities law violation.
Need for Regulatory Clarity
The Flyfish Club case is a good reminder that regulatory clarity is needed for investors, NFT developers and creatives alike.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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