SEC sues Stoner Cats in second major NFT enforcement case; project settles for $1M

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The Securities and Exchange Commission (SEC) has charged Stoner Cats 2 LLC (SC2), the creator of the web series Stoner Cats, with conducting an unregistered offering of non-fungible tokens (NFTs), marking the second major enforcement action by the SEC in the NFT space.

The regulatory body found that SC2 had raised approximately $8 million from investors through the sale of more than 10,000 NFTs, selling for about $800, to finance the animated series. As the SEC reported, SC2 has agreed to a cease-and-desist order and to pay a civil penalty of $1 million without admitting or denying the SEC’s findings.

According to Carolyn Welshhans, Associate Director of the SEC’s Home Office:

“Registration of securities, including crypto asset securities, protects investors by providing them with disclosures so they can make informed investing decisions… Stoner Cats wanted all the benefits of offering and selling a security to the public but ignored the legal responsibilities that come with doing so.”

Consequently, the SEC found that SC2 had violated the Securities Act of 1933 by offering and selling these crypto asset securities to the public in an offering that was not registered or exempt from registration.

‘Economic reality’

The SEC order unveiled that SC2’s marketing strategy, both before and after the public sale of Stoner Cats NFTs, accentuated the specific benefits of owning the NFTs — notably, the prospect for owners to resell their NFTs on the secondary market. This strategy was potentially driven by the aspirations of a successful web series, which could lead to a surge in the resale value of the NFTs. According to the SEC’s statement, investors were led to believe they would profit from the sale of the NFTs on the secondary market, driven by SC2’s emphasis on its Hollywood production expertise, its understanding of crypto projects, and the celebrity actors involved in the web series.

Notably, the order found that SC2 configured the Stoner Cats NFTs to provide itself with a 2.5 percent royalty from each secondary market transaction involving the NFTs. This configuration, coupled with encouragement from SC2 for individuals to buy and sell the NFTs, resulted in purchasers spending more than $20 million in over 10,000 transactions.

This SEC enforcement action follows another case where the regulatory body charged LA-based media firm Impact Theory with conducting an unregistered offering of NFTs. These actions signify that the regulatory body has been actively examining NFT markets.

Despite industry-wide calls for “regulatory clarity,” SEC Chair Gary Gensler has steadfastly maintained the view that the vast majority of digital assets qualify as securities under U.S. law. In a June speech, Gensler rejected the view that current securities law does not adequately apply to digital assets, arguing that relabeling contracts does not change the nature of their “economic reality”—language that was echoed in today’s press release.

Gensler has also dismissed claims of ‘fair notice,’ stating that some market participants may have made a calculated economic decision to risk enforcement as a cost of doing business.

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