SEC Charges Creator of Stoner Cats Web Series for Unregistered Offering of NFTs

The Securities and Exchange Commission (SEC) has taken action against Stoner Cats 2 LLC (SC2), alleging that they conducted an unregistered offering of crypto asset securities in the form of purported non-fungible tokens (NFTs), raising approximately $8 million from investors to finance an animated web series called Stoner Cats.

According to the SEC order, on July 27, 2021, SC2 offered and sold more than 10,000 NFTs to investors for approximately $800 each, and these were sold out within 35 minutes. The SEC’s order states that SC2’s marketing campaign, both before and after the sale of Stoner Cats NFTs, highlighted specific benefits, including the option for owners to resell their NFTs on the secondary market. The SEC also found that SC2 emphasized its expertise as Hollywood producers, knowledge of crypto projects, and the involvement of well-known actors in the web series, leading investors to expect profits from the resale value of Stoner Cats NFTs.

Moreover, the SEC’s order reveals that SC2 configured the Stoner Cats NFTs to provide the company with a 2.5 percent royalty for each secondary market transaction, encouraging individuals to buy and sell the NFTs, resulting in over $20 million spent in at least 10,000 transactions. The SEC alleges that SC2 violated the Securities Act of 1933 by conducting this unregistered offering of crypto asset securities.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized that the economic reality of the offering, rather than labels or objects, determines whether it qualifies as an investment contract and therefore a security. In this case, the SEC found that Stoner Cats’ marketing practices and actions led investors to believe they would profit from selling the NFTs in the secondary market.

Carolyn Welshhans, Associate Director of the SEC’s Home Office, highlighted the importance of securities registration in protecting investors by providing necessary disclosures for informed investment decisions.

Without admitting or denying the SEC’s findings, SC2 agreed to a cease-and-desist order and will pay a civil penalty of $1 million. A Fair Fund will be established to return money to injured investors who purchased the NFTs. SC2 also agreed to destroy all NFTs in its possession or control and publish notice of the order on its website and social media channels.