SEC Charges Stoner Cats Over NFT Offerings

The U.S. Securities and Exchange Commission (SEC) has taken action against Stoner Cats 2 LLC (SC2), accusing the firm of conducting an unregistered crypto asset securities offering. The offering, which took place in the form of non-fungible tokens (NFTs), was intended to raise funds for an animated web series titled "Stoner Cats." The SEC's announcement reveals that SC2 successfully raised approximately $8 million from this venture.

In a detailed breakdown, the SEC highlighted that on July 27, 2021, SC2 made available over 10,000 NFTs for sale at a price point of roughly $800 each. These NFTs were snapped up by eager investors in a mere 35 minutes. Further scrutiny by the SEC found that SC2 had set up the Stoner Cats NFTs to yield a 2.5 percent royalty from each secondary market transaction. This strategy, coupled with active encouragement for individuals to trade the NFTs, resulted in transactions exceeding $20 million across at least 10,000 trades.

Gurbir S. Grewal, the Director of the SEC’s Division of Enforcement, commented on the matter, emphasizing that the nature of the offering, rather than its label or underlying assets, determines its classification as an investment contract and, consequently, a security.

In response to the SEC's findings, SC2 has neither admitted nor denied the allegations. However, they have consented to a cease-and-desist order and have committed to paying a civil penalty amounting to $1 million.

The SEC's decision has not been without its critics. Notably, SEC commissioners Hester Peirce and Mark Uyeda have voiced their dissent. They argue that the activities of SC2 could be viewed as fan crowdfunding—a practice they believe is prevalent among artists and creators. Drawing a parallel, the commissioners likened the Stoner Cats NFTs to Star Wars collectibles sold in the 1970s, suggesting that such ventures were not uncommon and should not be penalized retroactively.

The crypto community has also weighed in on the controversy. Crypto Tea, a prominent YouTuber, defended Stoner Cats, stating that the project successfully raised funds and delivered on its promises.

This incident underscores the ongoing debate surrounding the classification and regulation of NFTs, highlighting the need for clearer guidelines in the rapidly evolving digital asset space.