On September 13, 2023, Stoner Cats 2 LLC faced an enforcement action from the U.S. Securities and Exchange Commission (SEC) for allegedly raising around $8 million through an unregistered offering of Non-Fungible Tokens (NFTs) that were considered securities. This case highlights the SEC’s tendency to view certain crypto assets as securities based on the specific manner in which they are offered.
The SEC’s claims revolve around an offering that took place on July 27, 2021, where Stoner Cats 2 LLC sold 10,320 NFTs in just 35 minutes for approximately $800 each. These NFTs were part of the company’s marketing campaign for its web series, Stoner Cats. The SEC focused on certain aspects of the offering, despite the fact that the NFTs were essentially collectibles. The company allegedly promoted the benefits of owning the NFTs, including the option to resell them in a secondary market, which would generate a 2.5% royalty for the company for each transaction. Furthermore, buyers were promised that if all the NFTs were sold, the company would establish a decentralized autonomous organization consisting of NFT holders to develop new animation projects.
The SEC claimed that the company’s marketing efforts led investors to expect profits from their entrepreneurial and managerial efforts, as the success of the web series could increase the resale value of the Stoner Cats NFTs in the secondary market. Consequently, the SEC argued that these NFTs should be classified as securities. By offering and selling them in an unregistered offering, the company violated Sections 5(a) and 5(c) of the Securities Act of 1993, which prohibit such activities.
In response to the enforcement action, Stoner Cats 2 LLC neither admitted nor denied the SEC’s allegations but agreed to cease and desist, destroy any NFTs in its possession, and pay a civil penalty of $1 million. The SEC established a fair fund to provide restitution to investors who allegedly suffered harm by purchasing the NFTs.
Commissioners Hester M. Peirce and Mark T. Uyeda dissented from the SEC’s decision to take action against Stoner Cats 2 LLC. They argued that the company’s campaign resembled crowdfunding, a common practice among artists and entertainers in the digital age. According to the dissenting commissioners, the Stoner Cats NFTs were no different from collectibles like Star Wars memorabilia sold in the past. They acknowledged that NFT creators should not be exempt from securities laws but urged the SEC to offer clear guidance instead of pursuing enforcement actions arbitrarily after the fact.
In light of this case, it is important for any company considering the sale of NFTs to proceed cautiously and ensure that their marketing efforts do not inadvertently classify the NFTs as securities. Until the SEC provides clearer guidance regarding the regulatory treatment of NFTs, companies must navigate this space carefully to avoid potential legal issues.
For more information, you can refer to the official document of the case, titled “In the Matter of Stoner Cats 2, LLC,” available at the provided link. [Source: “View source”.]