The SEC has taken action against Stoner Cats 2 LLC, alleging that the company conducting an unregistered offering of crypto-asset securities disguised as NFTs. The offering, which purportedly aimed to finance the creation of an animated web series known as "Stoner Cats" (currently rated lukewarm 4.7/10 on IMDb), managed to roll up a cool USD$8 million from collectors (or "investors" as the SEC likes to call them) in an offering that was allegedly a total buzzkill in terms of meeting the necessary exemption criteria for registration under US law.
According to the SEC's order, on 27 July 2021, Stoner Cats initiated the sale of more than 10,000 NFTs, each priced at around USD$800 and the initial supply sold out in 35 minutes. The SEC alleges that both prior to and following the sale of the Stoner Cats NFTs to the public, the company was sky high, extensively marketing the financial benefits of ownership of the Stoner Cat NFTs, emphasising the potential for resale on the secondary market.
The SEC order also alleges that the marketing campaign prominently featured the company's Hollywood expertise, familiarity with cryptocurrency projects, and the involvement of well-known actors in the web series. A quick google search of "Stoner Cats" will reveal various articles linking famous actors Mila Kunis and Ashton Kutcher to the project.
The SEC further alleges that the company had lit up the Stoner Cats NFTs to grant the company a 2.5% royalty on each secondary sale, with the company actively encouraging individuals to toke transactions of the Cats and leading to a dank USD$20 million or so in fees across at least 10,000 transactions. Gurbir S. Grewal, Director of the SEC's Division of Enforcement, emphasised the SEC's 'substance over form' approach:
Regardless of whether your offering involves beavers, chinchillas, or stonerific NFTs, under the federal securities laws, it's the economic reality of the offering - not the labels you put on it or the underlying objects - that guides the determination of what's an investment contract and therefore a security
Without admitting or denying the SEC's findings, the company has consented to a cease-and-desist order and agreed to pay a doobie of a civil penalty of USD$1 million. Additionally, the SEC order required the establishment of a 'Fair Fund' to reimburse collectors who say they were burned by holding the NFT too long while the price burned down. The order states that the company has also agreed to green out and destroy all NFTs in its possession and control.
In an interesting twist, secondary sales of Stoner Cats on platforms such as OpenSea have surged since the SEC's action against the company. No word on whether the royalties will be making their way on those sales back to the company.
This enforcement action by the SEC serves as a dank reminder of the regulatory haze surrounding crypto-asset offerings, particular those that blur the line between collectibles and securities. In an industry marked by rapid innovation and continuously evolving legal standards, it is easy for participants to get lost in the smoke. Despite the similarity between NFTs and other collectibles, and the absence of any enforcement against baseball card sellers, it seems the collectibles NFT world is not as safe a place as many had previously thought.
By Michael Bacina and Luke Higgins