Credit: Stoner Cats

SEC Fines Stoner Cats Creator Over NFT Offerings

BY Keisha Oleaga

September 13, 2023

In a recent development, the U.S. Securities and Exchange Commission (SEC) has settled charges with the creators of the ‘Stoner Cats’ animated web series for an unregistered NFT offering. The creators will pay a $1 million civil fine to settle the U.S. Securities and Exchange Commission charges. Here’s what you need to know:

What Happened?

Stoner Cats 2 LLC, the entity behind the animated series, faced SEC scrutiny over its sale of over 10,000 NFTs in July 2021. Priced at approximately $800 each, these tokens sold out in a swift 35 minutes, accumulating over $8 million.

The SEC’s main contention was that the NFTs were marketed and sold as investment opportunities rather than mere collectibles. Evidence points towards Stoner Cats 2 LLC’s promotional campaign emphasizing potential resale values in secondary markets. Further bolstering the SEC’s claims was the team’s highlighting of its expertise in the entertainment and crypto domains and the involvement of renowned actors in the series, which may have inadvertently led investors to expect profits.

Another point of contention was the built-in royalty mechanism, where Stoner Cats 2 LLC would receive a 2.5 percent royalty for every secondary market transaction involving their NFTs. This, combined with the marketing, resulted in transactions exceeding $20 million in the secondary market.

The NFT collection initially launched during the bull-run era of July 2021. Orchard Farm Productions, spearheaded by actress Mila Kunis, produced “Stoner Cats.” The collection was said to release an animated series, featuring the voices of Nila Kuns, Ashton Kutcher, Chris Rock, Ethereum’s Vitalik Buterin, and more.

SEC’s Stance

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized the significance of economic reality over labels. He mentioned, “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 determines what’s an investment contract and, therefore, a security.” This statement hints at the broader implications for other crypto projects that may inadvertently cross into the realm of securities.

Carolyn Welshhans, Associate Director of the SEC’s Home Office, further underscored the importance of securities registration, emphasizing that it exists to safeguard investors by ensuring they have access to vital information that helps them make informed investment decisions.

The Settlement

Without admitting to any wrongdoing, Stoner Cats 2 LLC has agreed to a series of measures:

  1. Paying a civil fine of $1 million.
  2. Establishing a Fair Fund to reimburse affected investors.
  3. Destroying all the NFTs they currently possess or control.
  4. Publicize the order on their website and social media platforms.

What This Means for the Future

The swift action by the SEC serves as a crucial reminder for entities in the rapidly evolving crypto space. With the lines blurring between collectibles and “securities”, creators and investors need to be aware of regulatory compliance and the implications of their offerings. As the world of digital assets continues to expand, regulatory bodies like the SEC will likely be watching closely.

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