For curmudgeonly commissioners like us, crypto enforcement feels a bit like a trip to a restaurant for a meal, Omakase style. 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. Leaving crypto to be addressed in an endless series of misguided and overreaching cases has been and continues to be a consequential mistake. By its very nature, Omakase dining requires a deep level of trust. Americans should be able to extend a similar trust to our regulators. Today’s settled enforcement action with Flyfish Club for its sale of non-fungible tokens (“NFTs”) is just the latest dish that undermines trust in Chef SEC.[1] Accordingly, we dissent.
Flyfish Club, a dining club, sold NFTs—unique digital tokens recorded on a blockchain—as the exclusive way to access a yet-to-be-built restaurant and bar. Flyfish NFT owners will be eligible to eat in the restaurant, which is scheduled to open soon (though they will still have to pay for their food and drink). A pricier Omakase NFT qualifies owners to eat in the more exclusive Omakase room. Flyfish and Omakase NFT owners can lease or sell their NFT—and thus their membership—to someone else. The Flyfish Club received royalties for many of the secondary sales and earned $2.7 million in such royalties. Flyfish created approximately 3,000 NFTs, of which it sold slightly more than half at $8,400 for the regular NFTs and $14,300 for the Omakase NFTs, for aggregate proceeds of $14.8 million. Flyfish Club held on to the remaining NFTs for future distribution. According to an interview with a Flyfish principal that was excerpted in the order, the intent behind Flyfish’s utility-based NFT project was to “build a large business around this with multiple clubs, ancillary offerings, other social experiences, pop-up events, and build a whole world around Flyfish Club.” That is to say, the social experiences were at the heart of the Flyfish venture.
The Commission, with the many demands on its time and resources, inexplicably has decided to focus on membership in an exclusive dining club. 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.[2] In our view, the NFTs here are utility tokens, not securities, and statements by the founders and NFT purchasers that a successful restaurant would cause the NFT price to rise do not change that. While a member potentially could earn a profit by leasing or selling her token, the NFT has a concrete use: you need it to eat at the Flyfish Club. The Order slaps the Howey label on these NFTs because “Investors in Flyfish NFTs had a reasonable expectation of obtaining future profits based on the managerial and entrepreneurial efforts of Flyfish and its principals.” To the contrary, Howey is inapt because holders of Flyfish NFTs had a reasonable expectation of obtaining in the future wonderful culinary experiences and other exclusive membership experiences based on the managerial and entrepreneurial efforts of Flyfish and its principals. Whether their expectations will be met should not be judged by a securities regulator. Might someone who moved out of the area or moved on to a new phase of life decide to sell her membership? Sure. And might—as the Order states—many purchasers have purchased the NFTs with speculative intent? Sure. A well-known artist who sells a limited set of numbered prints may be selling to a couple who wants to display her art in their home, or to someone who wants to turn around and sell it for a profit and is making a bet on the artist’s future. The intent of a buyer cannot 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?[3]
The securities laws are not needed here, and their application is harmful both in the present case and as future precedent. 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? 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. Experiments like Flyfish Club are not a threat to the American investor. Creative people should be able to experiment with NFTs without having to consult a high-priced tea-leaf reader—ahem, lawyer. The Commission can change its menu to include a healthy serving of guidance to give non-securities NFT creators the freedom to experiment.
[1] In the Matter of Flyfish Club, LLC, Securities Act of 1933 Release No. 33-11305 (Sept. 16, 2024).
[2] The Commission staff has focused an expansive jurisdictional eye on club memberships in the past. See, e.g., Division of Corporation Finance Letter re Riverview Racquet Club, Inc. (Jul. 3, 1975) (promising not to recommend enforcement based on the unregistered sale of memberships in a family athletic and social club), Division of Corporation Finance Letter re Golf Club of Englewood, Inc. (Mar. 15, 1985) (promising not to recommend enforcement action in connection with the unregistered sale of golf club memberships), Letter from Division of Corporation Finance re LA Fan Club, Inc. Membership Program (June 28, 2017) (promising not to recommend an enforcement action in connection with the unregistered sale of LA Rams fan club memberships). Those staff letters were conditioned on restrictive terms such as promises not to so much as breathe words like “investment” or “profit” and prohibitions on profiting from transferring the membership. The concerns in this dissent would apply equally if, absent other facts, the Commission required clubs to register their membership programs – or to secure Commission’s or the staff’s assent to avoid registering – even if the programs contradicted the terms set forth in the staff letters.
[3] The Order requires Flyfish Club to remove all links on its website and social media channels to crypto asset trading platforms. Order at ¶23.a.
