Commissioners Dissent on SEC's NFT Enforcement Action on Stoner Cats 2, LLC

Commissioners Hester M. Peirce and Mark T. Uyeda of the Securities and Exchange Commission (SEC) have expressed their dissent regarding the Commission's recent enforcement action on Stoner Cats 2, LLC's non-fungible token (NFT) settlement. This marks the second time the Commission has taken such an action, with the Commissioners previously dissenting from the first.

The central issue revolves around the application of the Howey investment contract analysis to NFTs. The Commissioners argue that this application "lacks any meaningful limiting principle" and could have broad implications for creators across various domains. They emphasize that if securities laws were applied to physical collectibles in the same manner as they are to NFTs, it could stifle artists' creativity due to legal uncertainties.

The Commissioners' statement highlights the need for clear guidelines for artists and creators who wish to utilize NFTs to support their creative endeavors and engage with their fan communities. They stress that just because a transaction involves money, it doesn't automatically categorize NFTs as securities.

The recent enforcement action in question pertains to an event in July 2021, where Stoner Cats sold 10,320 NFTs to the public, raising ether valued at $8.2 million. This funding was used to produce an animated series titled "Stoner Cats." Those who purchased the NFTs received a unique image of a character from the series, exclusive access to the series and an online community, and access to unspecified future entertainment content. Notably, several renowned writers, animators, and voice actors collaborated on this project.

Drawing a parallel to the past, the Commissioners compared the Stoner Cats NFTs to Star Wars collectibles sold in the 1970s. Following the successful release of Star Wars in 1977, Kenner, a toy company, sold "Early Bird Certificate Packages" that could later be redeemed for action figures and a membership in the Star Wars fan club. The Commissioners posed a rhetorical question, suggesting that if the SEC's current analysis were applied back then, the certificates might have been deemed investment contracts.

The statement concludes by acknowledging that while NFT creators are not exempt from securities laws, the Commission should ensure that artists retain the freedom to sell their work, cultivate a fan base, and involve fans in future projects. They believe that the SEC's current approach to NFTs could deter content creators from leveraging social networks for content creation and distribution, further adding to the legal ambiguity faced by artists and other creators.