The Securities and Exchange Commission charged Stoner Cats 2 LLC with conducting an unregistered offering of nonfungible tokens that brought in $8 million from investors.
The move is the latest action brought by the agency against an NFT project after similar charges involving Impact Theory last month.
"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," Gurbir S. Grewal, the SEC’s director of its enforcement division, said in a statement on Wednesday.
Stoner Cats 2, or SC2, sold out more than 10,000 NFTs for about $800 each in just 35 minutes. Before and after the NFTs were sold to the public, SC2 marked certain benefits of owning them, including the ability to resell the NFTs on the secondary market, the SEC said.
"Here, the SEC’s order finds that Stoner Cats marketed its knowledge of crypto projects, touted that the price of their NFTs could increase and took other steps that led investors to believe they would profit from selling the NFTs in the secondary market," Grewal said.
Stoner Cats is a cartoon show about house cats, which the SEC says become "sentient after being exposed to their owner’s medical marijuana." SC2 received a 2.5 percent royalty from the NFTs for each transaction on a secondary market platform, the SEC said.
"The royalties also helped to assure owners of the NFTs that SC2 would remain committed to the animated show after receiving the Stoner Cats NFTs offering proceeds. If the Stoner Cats show was successful, the price of the NFTs could rise and so could the amount of royalties,” the agency said.
Stoner Cats 2 did not admit or deny the SEC's findings and agreed to pay $1 million and destroy all NFTs in its possession.
Ashton Kutcher, Jane Fonda
Stoner Cats was one of the first television shows to be fully funded by NFTs. The show follows a family of cats voiced by several well-known names including Ashton Kutcher, Jane Fonda, Chris Rock, and even Ethereum co-founder Vitalik Buterin.
A total of 10,420 unique NFTs were created based on the characters in the show, according to the project's website. They were minted and sold in July of 2021. The first six episodes were accessible only to holders of the NFTs.
Other celebrities too have embraced crypto and found themselves in regulatory trouble. Kim Kardashian was charged last year for unlawfully promoting EthereumMax and agreed to pay over $1 million in penalties. Boxer Floyd Mayweathr Jr. and music producer DJ Khaled too faced similar charges to Kardashian in 2018.
Another group of celebrities including Tom Brady, Gisele Bündchen, Steph Curry and Larry David that did marketing for failed crypto exchange FTX faced a class action lawsuit in November.
Akin to Star Wars collectibles
SEC Commissioners Hester Peirce and Mark Uyeda criticized the SEC’s charges and said Stoner Cats NFTs are "not that different" from Star Wars collectibles that were sold in the 1970s.
"The sales of these certificates helped to build a die-hard community of Star Wars fans. Would those I.O.U. certificates, which could be re-sold, constitute investment contracts? Using the analysis of today’s enforcement action, the SEC should have parachuted in to save those kids from Star Wars mania,” the Republican commissioners said in a statement.
That doesn't mean NFTs and other artists should get a free pass from the securities law, Peirce and Uyeda said.
"In applying the securities laws in this space, however, the Commission must take care to preserve the ability of artists to sell their work, build a fan base, and involve that fan base in future creative endeavors," the commissioners said.
(Updated with details throughout.)
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