Restaurant Settles Controversial SEC Action Over NFT Membership Program

A restaurant has settled an enforcement action from the U.S. Securities and Exchange Commission over its NFT-based membership program.

On Sept. 16, the Flyfish restaurant settled with the SEC for $750,000 over a cease-and-desist alleging that sales of its Flyfish NFTs constituted an unregistered securities offering.

From August 2021 through May 2022, Flyfish sold 1,600 of roughly 3,000 NFTs to fund the construction of Flyfish Club — a members-only club, restaurant, and bar in New York exclusively accessible to NFT holders. The two-tiered NFT sale distributed tokens at prices of 2.5 ETH (roughly $8,400) and 4.25 ETH (approximately $14,300), generating $14.8 million in gross sales. Flyfish Club is scheduled to commence operations during Q4 2024.

The SEC asserted that Flyfish led investors to expect to reap a financial return on their NFT purchases by suggesting that holders could either lease the NFT to consumers seeking to dine at the restaurant or sell the token for more than they paid. Roughly 42% of investors purchased more than one NFT despite only needing one token to attain Flyfish Club membership.

“Investors in Flyfish NFTs had a reasonable expectation of obtaining future profits based on the managerial and entrepreneurial efforts of Flyfish and its principal,” the SEC filing said. “One Flyfish principal stated in an interview on CNBC: ‘You are going to go [to the restaurant] three, four, or five times, and then want to sell [the NFT] and make a profit’.”

The SEC noted that Flyfish NFTs have traded thousands of times on secondary markets, with the tokens trading at a premium of between 50% and 100% compared to the initial sale price shortly after launching. As of July 11, the two NFTs were trading below their initial sale price by 74% and 32%.

Flyfish earned a 10% royalty each time the tokens traded on particular marketplaces, netting an additional $2.7 million in revenue for the business. Flyfish has agreed not to accept any royalties moving forward and to destroy all of the unsold NFTs — which it had intended to sell at a later date.

SEC commissioners dissent

The enforcement action has attracted dissent from within the SEC’s own ranks, with commissioners Hester Peirce and Mark Uyeda — historic allies of the crypto industry — publishing a statement criticizing the SEC for dedicating resources to going after Flyfish.

“The Commission, with the many demands on its time and resources, inexplicably has decided to focus on membership in an exclusive dining club,” the statement said. “This case is not one in which the Commission alleges fraud; it finds only that Flyfish Club should have registered its sale of membership NFTs as securities transactions.”

The commissioners emphasize that Flyfish NFTs have a “concrete use” by allowing holders to eat at the restaurant. As such, they argue that the tokens comprise utility tokens rather than securities — regardless of statements from the restaurant’s founders suggesting Flyfish Club’s success could cause the NFTs to rise in price or holders’ ability to rent the tokens out.

Although some buyers purchased FLyfish NFTs as an investment, the commissioners assert that “the intent of a buyer cannot transform a non-security into a security,” noting that artworks aren’t classified as securities despite some buyers collecting art for speculative purposes.

“NFTs offer a promising way to allow creative people — such as chefs, musicians, or visual artists — to monetize their talent and a potentially efficient way for selling access to experiences and communities,” the statement said. “The Flyfish NFTs were simply a different way to sell memberships… Experiments like Flyfish Club are not a threat to the American investor.”