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Flyfish Club, the company behind the members-only club scheduled to open in Manhattan this month, has settled with the Securities and Exchange Commission over alleged violations.
Per the settlement agreement, Flyfish has until Sept. 26 to “destroy all Flyfish NFTs in its possession,” cease accepting royalty payments from secondary market trading platforms on Flyfish NFT sales and pay a civil penalty of $750,000.
In 2021 and 2022, Flyfish sold memberships to its yet-to-be-built private club through non-fungible tokens (NFTs) priced between 2.5 ETH and 4.25 ETH. Approximately 1,600 NFTs were sold, generating around $14.8 million in gross proceeds. These funds were used to finance the construction of the “Flyfish Club,” a private restaurant in downtown Manhattan, according to the SEC.
“Flyfish led investors to expect profits from the entrepreneurial and managerial expertise of Flyfish and its principals in building and running the restaurant,” the SEC wrote in the settlement agreement. “Flyfish told investors they could potentially profit from reselling their NFTs at appreciated prices in the secondary market.”
Read more: The SEC continues to engage in ‘strategic ambiguity,’ lawyer says
Flyfish also told investors that “leasing” out its tokens to non-members was a way to make a profit.
The club is scheduled to open this week on Sept. 20, according to social media posts. While the club’s website acknowledges that the venture originally “launched with blockchain-based memberships,” interested members may now only apply for “standard memberships.” Current NFT holders are still allowed to lease their tokens to others to gain access to the club, the website adds.
SEC Commissioners Hester Peirce and Mark Uyeda, who have frequently differed from their colleagues on blockchain-related enforcement actions, issued a dissenting opinion.
“For curmudgeonly commissioners like us, crypto enforcement feels a bit like a trip to a restaurant for a meal, Omakase style,” Peirce and Uyeda wrote, referencing the Japanese dining experience Flyfish Club plans to offer.
“Omakase translates to, ‘I’ll leave it up to you.’ This directive is wonderful in the hands of a renowned chef, but disastrous in the hands of a crypto-obsessed Commission,” they added.
The NFTs in question, Peirce and Uyeda argue, are not securities as their colleagues claim, but rather utility tokens. This is true even if the restaurant’s success caused the NFT prices to increase, the commissioners say.
Flyfish NFT purchasers did not have a “reasonable expectation of profit,” Peirce and Uyeda say, but rather a reasonable expectation of “wonderful culinary experiences and other exclusive membership experiences.”
“The securities laws are not needed here, and their application is harmful both in the present case and as future precedent,” they added. “The Flyfish NFTs were simply a different way to sell memberships. Why shouldn’t a chef be able to sell memberships to eat at her kitchen table and to collect royalties on resales of those memberships?”
Flyfish did not immediately return Blockworks’ request for comment.