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

The Securities and Exchange Commission (SEC) has charged Stoner Cats 2 LLC (SC2), the creator of the web bid Stoner Cats, with conducting an unregistered offering of non-fungible tokens (NFTs), marking the 2nd large enforcement enactment by the SEC successful the NFT space.

The regulatory assemblage recovered that SC2 had raised astir $8 cardinal from investors done the merchantability of much than 10,000 NFTs, selling for astir $800, to concern the animated series. As the SEC reported, SC2 has agreed to a cease-and-desist bid and to wage a civilian punishment of $1 cardinal without admitting oregon denying the SEC’s findings.

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

“Registration of securities, including crypto plus securities, protects investors by providing them with disclosures truthful they tin marque informed investing decisions… Stoner Cats wanted each the benefits of offering and selling a information to the nationalist but ignored the ineligible responsibilities that travel with doing so.”

Consequently, the SEC recovered that SC2 had violated the Securities Act of 1933 by offering and selling these crypto plus securities to the nationalist successful an offering that was not registered oregon exempt from registration.

‘Economic reality’

The SEC bid unveiled that SC2’s selling strategy, some earlier and aft the nationalist merchantability of Stoner Cats NFTs, accentuated the circumstantial benefits of owning the NFTs — notably, the imaginable for owners to resell their NFTs connected the secondary market. This strategy was perchance driven by the aspirations of a palmy web series, which could pb to a surge successful the resale worth of the NFTs. According to the SEC’s statement, investors were led to judge they would nett from the merchantability of the NFTs connected the secondary market, driven by SC2’s accent connected its Hollywood accumulation expertise, its knowing of crypto projects, and the personage actors progressive successful the web series.

Notably, the bid recovered that SC2 configured the Stoner Cats NFTs to supply itself with a 2.5 percent royalty from each secondary marketplace transaction involving the NFTs. This configuration, coupled with encouragement from SC2 for individuals to bargain and merchantability the NFTs, resulted successful purchasers spending much than $20 cardinal successful implicit 10,000 transactions.

This SEC enforcement enactment follows different lawsuit wherever the regulatory body charged LA-based media steadfast Impact Theory with conducting an unregistered offering of NFTs. These actions signify that the regulatory assemblage has been actively examining NFT markets.

Despite industry-wide calls for “regulatory clarity,” SEC Chair Gary Gensler has steadfastly maintained the presumption that the immense bulk of integer assets suffice arsenic securities nether U.S. law. In a June speech, Gensler rejected the presumption that existent securities instrumentality does not adequately use to integer assets, arguing that relabeling contracts does not alteration the quality of their “economic reality”—language that was echoed successful today’s property release.

Gensler has besides dismissed claims of ‘fair notice,’ stating that immoderate marketplace participants whitethorn person made a calculated economical determination to hazard enforcement arsenic a outgo of doing business.