NFT Cat Fight: SEC Offensive Against NFTs Continues with Stoner Cats 2, LLC | ArentFox Schiff
The US Securities and Exchange Commission (SEC) has taken another enforcement action against an NFT project, following its recent action against Impact Theory, LLC. This time, the SEC has charged Stoner Cats 2, LLC (SC2) with conducting an unregistered offering of securities in the form of non-fungible tokens (NFTs) in violation of the Securities Act of 1933.
Stoner Cats 2, LLC raised approximately $8.2 million from investors for its adult animated television show called Stoner Cats. The show features house cats that gain sentience after exposure to their owner’s medical marijuana. The company conducted a public offering of NFTs on July 27, 2021, where 10,320 NFTs were sold for 0.35 ETH (approximately $800) each. The sale was completed in just 35 minutes.
This SEC enforcement action is significant because it marks only the second one targeting an NFT project, rather than focusing on cryptocurrency as the primary subject of enforcement activity in the digital asset space. SC2 settled the case with the SEC and consented to the cease-and-desist order issued by the SEC, without admitting or denying the findings.
One of the key issues highlighted in the settlement order is how Stoner Cats NFTs were traded in secondary markets immediately after being minted. Over 10,000 secondary market transactions occurred between July 27, 2021, and June 2, 2022. Many NFTs purchased in the offering were resold before the release of the second episode of the Stoner Cats series. SC2 minted an additional 100 NFTs and collected a 2.5% royalty on each secondary market transaction, resulting in over $20 million worth of ETH being spent.
The promotion of Stoner Cats NFTs on secondary markets played a significant role in the SEC’s findings. SC2 marketed these NFTs as comparable to “tickets” that could be sold elsewhere. The SEC noted that SC2 frequently touted the sales of their NFTs in secondary markets on Twitter and emphasized the value of these sales.
SC2 also informed potential purchasers that their investment would contribute to the development of the web series and promised exclusive access to the content. The SEC’s order highlighted SC2’s marketing campaign, which emphasized the involvement of Hollywood producers, actors like Ashton Kutcher and Mila Kunis, and their expertise in crypto projects. These marketing efforts led investors to expect profits from the resale of the NFTs.
Under the settlement order, SC2 is required to destroy all Stoner Cats NFTs, publish a notice of the SEC’s order on its website, pay a $1 million civil money penalty to the SEC, and establish a fair fund to compensate injured investors.
The SEC’s actions against Stoner Cats and Impact Theory demonstrate the regulator’s focus on NFTs as securities offered and sold in violation of securities laws. However, SEC Commissioners Hester Peirce and Mark Uyeda issued a dissenting opinion, calling for the establishment of clear guidelines for NFT sponsors and promoters. They believe that the enforcement actions contribute to legal ambiguity within the creative community. Meanwhile, the majority of SEC Commissioners are content with letting the law evolve through the enforcement process.
As a result, sponsors of NFTs, as well as contributing artists and endorsers, are advised to exercise caution in their activities. The SEC’s continued pursuit of enforcement investigations and cases in the NFT and cryptocurrency space indicates that the regulator is determined to enforce securities laws in this rapidly evolving industry.
Source: [AFS Law](https://www.afslaw.com/perspectives/alerts/nft-cat-fight-sec-offensive-against-nfts-continues-stoner-cats-2-llc)
