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SEC Administrative Proceeding Stoner Cats NFT

by Melai Briones

The US Securities and Exchange Commission (SEC) has taken enforcement action against Stoner Cats 2, LLC (SC2) for conducting an unregistered offering of non-fungible tokens (NFTs) in violation of securities laws. This action comes shortly after the SEC’s enforcement action against Impact Theory, LLC, and marks only the second time the SEC has targeted an NFT project specifically.

Stoner Cats raised approximately $8.2 million from investors through a public offering of NFTs. Each NFT represented a unique image of one of the characters from the adult animated television show, Stoner Cats. The offering took place on July 27, 2021, and all 10,320 NFTs were sold in just 35 minutes. Unlike some other projects, ownership of the Stoner Cats NFTs did not grant any rights to the underlying intellectual property.

One of the key issues highlighted by the SEC in their settlement order was the trading of these NFTs on secondary markets. Immediately after being minted, the NFTs were resold multiple times, with over 10,000 transactions occurring before the release of the second episode of Stoner Cats. SC2 collected a 2.5% royalty on each transaction, resulting in over $20 million worth of ETH being spent in the secondary market.

SC2 marketed the Stoner Cats NFTs as comparable to “tickets” that could be sold elsewhere if people didn’t appreciate them. They also frequently touted the sales of their NFTs on Twitter, pointing to specific dollar amounts earned from secondary market sales and encouraging buyers to purchase more during a dip in the crypto markets.

Furthermore, SC2 promised investors exclusive access to the web series, an online platform, and future entertainment content. They highlighted their expertise as Hollywood producers and the involvement of actors like Ashton Kutcher and Mila Kunis in the series. The SEC found that these advertisements led investors to expect profits upon resale of the NFTs.

In response to the SEC’s enforcement action, SC2 settled the case and consented to the cease-and-desist order. As part of the settlement, SC2 is required to destroy all Stoner Cats NFTs and pay a civil money penalty of $1 million to the SEC. They must also establish a fair fund to allow injured investors to recoup their losses.

This enforcement action, along with the earlier action against Impact Theory, shows that the SEC is focused on regulating NFTs as securities. While determining whether a token or collectible is a security is fact-specific and depends on the circumstances of each case, the SEC appears determined to pursue enforcement investigations and cases in the NFT and cryptocurrency space.

There have been dissenting opinions within the SEC regarding the application of securities laws to NFTs. Commissioners Hester Peirce and Mark Uyeda have called for clearer guidelines to avoid legal ambiguity in the creative community. However, the majority of the SEC commissioners seem willing to let the law evolve through the enforcement process.

As a result, sponsors of NFTs, as well as contributing artists and endorsers, are advised to proceed with caution. The SEC’s actions suggest that they will continue to scrutinize NFT offerings and sales to ensure compliance with securities laws.

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