Key Takeaways
In a rare display of dissent, two top Securities and Exchange Commission (SEC) officials have accused their agency of misfiring in a lawsuit against a New York restaurant that sold non-fungible tokens (NFTs) as tickets for exclusive dining experiences, which the regulator claims violated securities laws.
In its latest filing , the SEC alleged that Flyfish’s sale of membership NFTs between August 2021 and May 2022 qualified as security offerings.
The New York restaurant reportedly sold 1600 NFTs between August 2021 and May 2021 and generated over $14.8 million. This, according to the SEC’s assessment, was a textbook case of a security offering because Flyfish had “reasonable expectation of obtaining future profits.”
However, Commissioners Hester Peirce and Mark T. Uyeda disagreed, saying the agency was overstretched and misapplying the Howey Test, a longstanding legal framework for determining what constitutes a security offering.
In a joint statement , the commissioners argued that the NFTs in question are utility tokens, not securities, as they provide a concrete benefit—access to exclusive dining experiences.
“You need it to eat at the Flyfish Club,” they wrote, dismissing the notion that buyers expected profits solely from the token’s appreciation in value. “While a member could profit by leasing or selling her token, the NFT has a concrete use.”
The commissioners also questioned the SEC’s logic, suggesting that a buyer’s intent cannot magically transform a non-security into a security.
“Will Flyfish Club members really be better off now that the Commission is making it much harder to sell their memberships?” they asked, implying that the agency’s actions may ultimately harm the very people it’s meant to protect.
In their conclusive statement, the two commissioners warned that the agency’s interference in businesses dealing with digital art or NFTs is uncalled for. They argued that the Flyfish NFTs were simply a different way to sell memberships, and it was not a crime to do so.
The commissioners contend that the SEC’s actions are stifling innovation and creativity and that entrepreneurs should be free to experiment with new technologies without undue regulatory burden. “Securities law is not needed everywhere,” they wrote.
“Creative people should be able to experiment with NFTs without consulting a high-priced tea-leaf reader—ahem, a lawyer, ” the commissioners wrote.
The commissioners instead suggested that the SEC should provide clearer guidance to non-securities NFT creators, allowing them the freedom to experiment and innovate.
“The Commission can change its menu to include a healthy serving of guidance to give non-securities NFT creators the freedom to experiment,” they added.
The commissioners’ comments come as the SEC’s approach to digital assets faces growing scrutiny from lawmakers, industry stakeholders, and even within the agency itself. Just recently, the agency issued a Wells notice to NFT marketplace OpenSea.