Unregistered NFT Offering: SEC Charges Stoner Cats, Fines $1 Million

The Securities and Exchange Commission (SEC) has announced that Stoner Cats 2 LLC (SC2) is facing charges for conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs). The tokens were sold to raise funds for an animated web series titled Stoner Cats. The SEC's order revealed that this NFT offering raised approximately $8 million from investors.

Marketing Emphasis on NFT Ownership Benefits

On July 27, 2021, SC2 offered and sold over 10,000 NFTs, each priced at around $800, which sold out in a mere 35 minutes. SC2's marketing campaign emphasized the benefits of owning these NFTs, including the option for owners to resell them on the secondary market.

The campaign also highlighted the team's expertise as Hollywood producers, their knowledge of crypto projects, and the involvement of well-known actors in the web series. These factors led investors to believe that they could profit from the NFTs in the secondary market if the web series succeeded.

SC2 configured the Stoner Cats NFTs to provide the company with royalties of 2.5 percent for each secondary market transaction involving these tokens. This royalty structure encouraged individuals to buy and sell the NFTs, resulting in over $20 million being spent in more than 10,000 transactions.

SC2's Agreement to Cease-and-Desist Order and Civil Penalty

The SEC's order determined that SC2's actions violated the Securities Act of 1933, as they offered and sold crypto asset securities to the public in an unregistered offering that did not qualify for an exemption from registration.

Gurbir S. Grewal, the Director of the SEC's Division of Enforcement, emphasized that the economic reality of the offering, rather than the labels or underlying objects, determines whether an investment qualifies as a security.

He stated, "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."

Carolyn Welshhans, the Associate Director of the SEC's Home Office, pointed out that SC2 wanted the benefits of offering and selling a security to the public but failed to meet the legal responsibilities associated with doing so. Registration of securities provides investors with the necessary disclosures to make informed investment decisions.

Without admitting or denying the SEC's findings, SC2 has agreed to a cease-and-desist order and a civil penalty of $1 million. The order also establishes a Fair Fund to return the funds that injured investors spent on purchasing the NFTs. Additionally, SC2 will destroy all NFTs under its control and publish a notice of the order on its website and social media channels.

The SEC's investigation was led by a team of experts and supervised by Carolyn Welshhans, the Crypto Assets and Cyber Unit Chief, David Hirsch, and the Deputy Chief, Jorge Tenreiro.

This case exemplifies the SEC's commitment to overseeing digital assets and ensuring issuer adherence to securities regulations. With the increasing popularity of NFTs and the crypto industry's expansion, regulatory authorities like the SEC are vigilantly monitoring these markets to safeguard investors and uphold market integrity.