SEC Takes On Stoner Cats

Following its first enforcement action against an NFT project two weeks ago, the SEC has followed up by announcing that charges have been filed—and already settled—against Stoner Cats 2, for what it describes as an unregistered securities offering.

On July 27, 2021, Stoner Cats 2 placed over 10,000 NFTs for sale at a price of around $800—selling out and raising $8 million in just 35 minutes. The NFTs were sold to raise money for an online animated series, also called "Stoner Cats".

Unregistered Securities

The SEC claims that Stoner Cats 2 heavily promoted the advantages of owning their NFTs, including the ability to resell them on secondary markets. Unlike many NFT projects, this was a highly professional operation. The team included experts in both Hollywood production and crypto. Well-known actors such as Ashton Kutcher were involved, adding to the sense of FOMO and leading investors to anticipate potential profits.

The SEC's press release also mentions the 2.5% royalty fee built into the Stoner Cats NFT contract, and the fact that the team had encouraged the community to buy and sell them, leading to around $20 million in volume across more than 10,000 transactions. The agency concluded that Stoner Cats 2 had violated the Securities Act of 1933 by offering and selling these cryptocurrency-based securities without proper registration or qualifying for an exemption.

The Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, said in the press release: "Regardless of whether your offering involves beavers, chinchillas or animal-based 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."

Dissent

Stoner Cats agreed to a cease-and-desist order, and payment of a $1 million civil penalty. The SEC's order establishes a "Fair Fund" to return funds that so-called injured investors paid for the NFTs. Stoner Cats also agreed to destroy all NFTs in its possession or control.

As in the last case, however, two SEC commissioners (including "Crypto Mom" Hester Peirce) disagreed with the regulator's decision, calling it heavy-handed and suggesting a clear framework needs to be created for NFTs before any more enforcement action occurs.

The SEC's continued targeting of NFT projects is more clear evidence of overreach. Presumably, it won't be long before a well-resourced project takes exception to their stance, and pulls the agency into yet another court battle.

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