The Securities and Exchange Commission (SEC) has made its second enforcement action in the NFT space, targeting Stoner Cats 2, LLC (SC2) for an alleged unregistered securities offering. The SEC issued a cease-and-desist order against SC2 for selling $8.2 million worth of non-fungible tokens (NFTs) to finance the production of a web-based animated series. SC2 has agreed to a settlement that includes a civil monetary penalty of $1 million and ceasing and desisting from violating the Securities Act of 1933.
The SEC’s action marks a significant escalation in the regulation of NFTs, following its first enforcement action against an NFT issuer. The SEC’s order alleges that SC2 issued, offered, and sold 10,320 Stoner Cats NFTs to the public, linking them to unique images of characters in the animated series. NFT holders were granted a limited license to display the character tied to their NFT and received exclusive access to episodes of the Stoner Cats show.
The SEC argues that SC2’s NFTs should be considered securities under the Howey test, which examines the economic reality of an offering. The SEC highlights SC2’s fundraising activities, promises of future value, and the marketing and managerial efforts of the issuer as indicia of securities transactions. The SEC also points to SC2 programming the NFTs to yield royalties on secondary sales and promoting the NFTs after they traded exclusively on the secondary market. This, according to the SEC, incentivized SC2 to increase the value of the NFTs and led buyers to expect profits from the success of the show.
SC2 has settled with the SEC without admitting or denying wrongdoing. The settlement includes a civil monetary penalty and a cease-and-desist order. As part of the settlement, SC2 must also destroy all implicated NFTs in its possession or control.
However, two of the SEC commissioners, Hester Peirce and Mark Uyeda, dissented in this case, as they had in the previous NFT enforcement action. They called for clear guidelines from the SEC for the NFT market and expressed concerns about the impact of enforcement actions on artists’ ability to sell their work and involve their fan base in future creative endeavors.
Overall, the SEC’s action against SC2 signals a ramping up of regulatory scrutiny in the NFT space. It remains to be seen how the SEC will continue to approach NFTs and whether clear guidelines will be provided to navigate this rapidly evolving market.