A recent dispute with regulatory authorities in the dynamic world of cryptocurrencies and nonfungible tokens (NFTs) has brought attention to the complex legal issues surrounding these digital assets.
The US Securities and Exchange Commission (SEC) intervened, charging the unregistered sale of crypto-asset securities in the form of NFTs, and “Stoner Cats,” a distinctive cartoon series, found itself at the center of this dispute. In-depth analysis of the “Stoner Cats” saga and its implications for the NFT market is provided here.
“Stoner Cats”: The Animated Series that Turned Heads
“Stoner Cats 2 LLC” (SC2), the company behind the intriguing “Stoner Cats” animated series, found itself in hot water with the SEC. The show, known for its unconventional premise, was made accessible exclusively to NFT holders. The cast was nothing short of impressive, featuring big names like Mila Kunis, Ashton Kutcher, Chris Rock, Dax Shepard, Gary Vaynerchuk, Jane Fonda, Michael Bublé, Seth MacFarlane, and even Vitalik Buterin, a co-founder of Ethereum.
The narrative of “Stoner Cats” revolved around the adventures of an elderly woman and her feline companions as they ventured into the world of cannabis consumption, creating a blend of comedy and fantasy that intrigued many. To access this unique series, viewers needed to hold NFTs issued by SC2, setting a precedent for content distribution in the digital age.
The SEC’s Allegations
The SEC’s scrutiny of “Stoner Cats” stemmed from SC2’s sale of more than 10,000 NFTs, each priced at approximately $800. This sale, which transpired on July 27, 2021, had a lightning-fast pace, concluding in just 35 minutes. The funds garnered from this NFT offering were earmarked for the financing of the “Stoner Cats” animated series.
These NFTs granted purchasers the privilege of viewing the series and became digital keys to unlock the stoner-infused escapades. Interestingly, the first episode of the series premiered merely two days after the NFT sale, creating a buzz in both the entertainment and crypto worlds.
However, it was the nature of this NFT sale that raised the SEC’s eyebrows. SC2 marketed these NFTs as having potential resale value, suggesting that the esteemed cast and creators lent significant prestige to the tokens. The NFTs were also structured in a way that ensured SC2 received a 2.5% royalty on each secondary sale. This commission structure led to over 10,000 secondary sales, amassing a total value exceeding $20 million, according to the SEC.
Related: SEC Charges Podcaster with Unregistered NFT Sales
The SEC’s Response
In response to these allegations, SC2 has agreed to a cease-and-desist order and additional measures mandated by the SEC. As part of this agreement, SC2 will pay a civil penalty of $1 million. A “fair fund” will be established to disburse restitution to “injured investors” affected by these NFT sales. Furthermore, SC2 will destroy all NFTs under its control or possession.
The fact that the NFTs were not CC0 (no rights reserved) was relevant to the security status analysis. The settlement order notes that the issuer reserved all commercial rights to the underlying intellectual property associated with each PFP. /2
— Mike Selig (@MikeSeligEsq) September 13, 2023
It’s crucial to note that, in agreeing to these measures, SC2 neither admitted to nor denied the charges brought forth by the SEC. This resolution highlights the growing regulatory scrutiny surrounding the NFT space and the need for clearer guidelines and standards in this burgeoning digital asset ecosystem.
This case marks a significant development in the SEC’s approach to NFTs, particularly in terms of securities regulation. It follows the SEC’s earlier charges against an NFT issuer in its case against Impact Theory in August. As the NFT market continues to evolve, it remains to be seen how regulatory authorities will navigate the complex landscape of digital collectibles and crypto-asset securities. For now, it serves as a reminder that the legal implications of NFTs are a topic deserving of close attention as the digital art and entertainment world continues to push boundaries and innovate in the blockchain space.