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(Kitco News) – The Securities and Exchange Commission is ramping up the pressure on non-fungible token (NFT) projects as the regulator charged Stoner Cats 2 LLC (SC2), the company behind the ‘Stoner Cats’ animated series, with conducting an unregistered offering of crypto asset securities after the company raised approximately $8 million through the sale of Stoner Cats NFTs.
According to a Wednesday press release from the SEC, “SC2’s marketing campaign highlighted specific benefits of owning [the NFTs], including the option for owners to resell their NFTs on the secondary market.”
The SEC also alleged that, as part of the marketing campaign, “the SC2 team emphasized its expertise as Hollywood producers, its knowledge of crypto projects, and the well-known actors involved in the web series, leading investors to expect profits because a successful web series could cause the resale value of the Stoner Cats NFTs in the secondary market to rise.”
The Stoner Cats project was led by actress Mila Kunis, who teamed up with established NFT creators. The cast of the animated series included Kunis, Ashton Kutcher, Chris Rock, Dax Shepard, Gary Vaynerchuk, Jane Fonda, Michael Bublé, Seth MacFarlane and Vitalik Buterin.
According to the SEC’s order, “SC2 violated the Securities Act of 1933 by offering and selling these crypto asset securities to the public in an unregistered offering that was not exempt from registration.”
“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,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
SC2 did not admit to or deny the SEC’s findings but has agreed to a cease-and-desist order and will pay a civil penalty of $1 million. SC2 also agreed to destroy all NFTs in its possession or control and publish notice of the order on its website and social media channels.
The SEC’s order also establishes a Fair Fund to return monies that injured investors paid to purchase the NFTs.
SEC commissioners Hester Peirce and Mark Uyeda pushed back against the order, arguing that the project’s activity constitutes fan crowdfunding, which they believe is commonplace for artists.
“We respectfully dissent from the Commission’s second non-fungible token (NFT) settlement,” they said in a response statement. “Were we to apply the securities laws to physical collectibles in the same way we apply them to NFTs, artists’ creativity would wither in the shadow of legal ambiguity.”
“Artists of all kinds have long struggled to support themselves, and NFTs offer a potentially viable way for them to monetize their talents,” they said. “The fact that money is involved does not transform NFTs into securities. This enforcement action involves activity that we believe constitutes fan crowdfunding – a common phenomenon in the world of artists, creators, and entertainers.”
They used the example of Star Wars collectibles sold in the 1970s that were originally offered as “Early Bird Certificate Packages” which holders would eventually be able to redeem for Luke Skywalker, Princess Leia, and R2-D2 action figures and membership in the Star Wars fan club.
“Would those I.O.U. certificates, which could be re-sold, constitute investment contracts?” they asked. “Using the analysis of today’s enforcement action, the SEC should have parachuted in to save those kids from Star Wars mania.”
“The Commission’s application of the securities laws here makes little sense and discourages content creators from exploring ways to harness social networks to create and distribute content,” they said. “More generally, it contributes to the legal ambiguity facing artists, writers, musicians, filmmakers, and others seeking to build a loyal, engaged following. Rather than arbitrarily bringing enforcement actions against NFT projects, we ought to lay out some clear guidelines for artists and other creators who want to experiment with NFTs as a way to support their creative efforts and build their fan communities.”
This is the second case over the past couple of months where the SEC brought charges of unregistered securities sales against an NFT issuer. In August, the regulator targeted Impact Theory, a media and entertainment company headquartered in Los Angeles, for the sale of its “Founder’s Keys” NFTs.
Impact Theory also did not admit to or deny the SEC’s findings, but agreed to abide by a cease-and-desist order, and had to pay more than $6.1 million in disgorgement, prejudgment interest, and civil penalties.