On 16 September 2024, the U.S. Securities and Exchange Commission (US SEC) issued a cease-and-desist order against Flyfish Club, LLC, a Delaware-based company, for offering and selling unregistered crypto asset securities in the form of non-fungible tokens (NFTs). The US SEC found that Flyfish raised approximately $14.8 million between August 2021 and May 2022 through the sale of about 1,600 NFTs, marketed as membership tokens for a luxury dining club in New York. The NFTs were deemed to be investment contracts, and Flyfish violated federal securities laws by failing to register the offering.
The US SEC determined that investors had a reasonable expectation of profits from the resale of the NFTs, making them securities under the Howey test. Flyfish also collected $2.7 million in royalties from secondary market sales until early 2023.
Between August 2021 and May 2022, Flyfish Club, LLC offered and sold approximately 1,600 non-fungible tokens (NFTs) to raise $14.8 million. These NFTs were marketed as “membership tokens,” granting holders access to an exclusive luxury dining club located in New York. Flyfish emphasized that owning these tokens was the sole means of gaining entry to the club, thereby attracting significant interest from potential buyers.
Following the initial sale, purchasers of the Flyfish NFTs were permitted to resell their tokens on secondary markets. Flyfish earned a 10% royalty on each resale, resulting in an additional $2.7 million in royalty revenue between August 2021 and early 2023. This secondary market activity enhanced the value and marketability of the NFTs, further promoting their resale and contributing to a perception among token holders that the NFTs represented more than mere club memberships.
Subsequently, the U.S. SEC initiated an investigation into the nature of these NFTs. The US SEC concluded that the tokens, marketed with the possibility of profit through resale, constituted “investment contracts” under the Howey test. This classification meant that the NFTs were subject to federal securities regulations, as they were offered and sold with a reasonable expectation of profit from the efforts of others.
The US SEC determined that Flyfish had failed to register these NFTs as securities, as required under federal law, nor had the company sought an exemption from registration. This failure to comply with registration requirements led to the US SEC’s enforcement action against Flyfish, culminating in charges for offering unregistered securities in the form of NFTs.
The US SEC ordered Flyfish to pay $750,000 in civil penalties. The payment is scheduled in installments: $350,000 within 14 days of the entry of the order, $200,000 by December 31, 2024, and the remaining $200,000 within 12 months of the order .
Flyfish Club, LLC is ordered to immediately cease offering and selling securities that are not registered with the US SEC, unless a valid exemption from registration applies. This halts the unregistered sales of their Flyfish Membership NFTs.
Flyfish Club, LLC is prohibited from conducting any future offerings of securities, including NFTs qualifying as securities, without proper registration with the US SEC or securing a valid exemption from registration. This prohibition ensures that Flyfish will comply with the necessary legal requirements for any future securities-related activities.
Flyfish is also directed to fully cooperate with the US SEC, including responding to any requests for documents or other evidence as part of any ongoing investigations or oversight activities related to this enforcement action. Compliance with this requirement will be crucial in ensuring Flyfish’s adherence to the US SEC’s directives.
Flyfish Club, LLC is required to enhance its internal compliance measures to ensure that its future operations remain consistent with US SEC regulations. This entails reviewing and adjusting its current practices to avoid future violations, thereby aligning its business operations with federal securities laws.
(Source: https://www.sec.gov/files/litigation/admin/2024/33-11305.pdf, https://www.sec.gov/newsroom/whats-new)
