Securities Regulation Daily Wrap Up, BLOCKCHAIN—FlyFish Club on the hook for $750,000 in wake of unregistered NFT offering, (Sep 17, 2024)
The NFTs were to serve as tickets to an exclusive club, but many were also bought as an investment.
FlyFish Club, LLC will pay a $750,000 penalty to settle SEC charges that it conducted an unregistered offering of NFTs. FlyFish sold NFTs that were the exclusive means of gaining entry to an exclusive New York City restaurant. FlyFish undertook significant marketing promoting the NFTs, and investors were led to expect profits if the club became successful. The Commission found that the NFTs were securities and that their offer and sale should have been registered. To settle the charges, FlyFish agreed to a cease-and-desist order, the penalty, and a series of undertakings (Flyfish Club LLC, Securities Act Release No. 11305 (Sept. 16, 2024)).
NFT offering. Between August 2021 and May 2022, FlyFish Club, LLC offered around 1,600 non-fungible tokens. The point of the offering was to fund the construction and operations of a members-only restaurant in New York City called the "FlyFish Club." Only purchasers or holders of FlyFish NFTs would be able to become members. There were two types of NFTs: regular NFT holders had access to the restaurant and bar, while "Omokase" holders had access to a VIP room. Even though only one token was needed to gain membership, about 42 percent of investors bought more than one in the offering.
FlyFish began marketing the NFTs in August 2021 in a variety of media, including promotional videos, podcasts, and social media. The communications emphasized that the value of the NFTs was linked to the restaurant's success and that they could be resold in the secondary market at a profit—tokens could even be "leased" to others to generate passive income. The FlyFish principals promised further that they would apply their managerial and entrepreneurial skills to ensure that investors profited from purchasing the NFTs.
Secondary market. Within six months, 75 percent of the NFTs had been resold in the secondary market, suggesting, the SEC said that they were bought with investment in mind. A survey indicated that over half of the indeed viewed the NFTs as investments. FlyFish itself received royalties on the resale transactions, and the price on the secondary market increased substantially by May 2022. In all, FlyFish sold approximately $14.8 million in NFTs, which was pooled to finance the restaurant's construction (it is scheduled to open in fall 2024).
Violations. The Commission found that FlyFish was required to, but did not, register the offer and sale of the NFTs, and there was no available exemption. The NFTs were investment contracts, and therefore securities, the order says, because investors had an expectation of profits based on FlyFish's managerial and entrepreneurial efforts.
Flyfish agreed to cease and desist from its violations of Securities Act Sections 5(a) and 5(c). In addition to a $750,000 civil penalty, FlyFish consented to a series of undertakings including destroying all of the NFTs in its possession, removing links to crypto asset trading platforms, and halting royalties from the sale of FlyFish NFTs.
The release is No. 33-11305.
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