SEC Settles Charges Against Stoner Cats, LLC for Unregistered Offering of NFTs | Practical Law

SEC Settles Charges Against Stoner Cats, LLC for Unregistered Offering of NFTs | Practical Law

The SEC filed and settled charges against Stoner Cats, LLC, for conducting an unregistered offering of non-fungible tokens (NFTs) that the SEC found to be crypto-asset securities.

SEC Settles Charges Against Stoner Cats, LLC for Unregistered Offering of NFTs

Practical Law Legal Update w-040-7470 (Approx. 5 pages)

SEC Settles Charges Against Stoner Cats, LLC for Unregistered Offering of NFTs

by Practical Law Finance
Published on 20 Sep 2023USA (National/Federal)
The SEC filed and settled charges against Stoner Cats, LLC, for conducting an unregistered offering of non-fungible tokens (NFTs) that the SEC found to be crypto-asset securities.
On September 13, 2023, the SEC issued a cease-and-desist order settling charges against Stoner Cats 2, LLC (SC2) for conducting an unregistered offering of non-fungible tokens (NFTs). On July 27, 2021, SC2 offered and sold to the public 10,320 NFTs and generated gross proceeds in ether (ETH) equal to approximately $8.2 million, which was used to fund the production of an animated web series, Stoner Cats.
The SEC claims that SC2 violated Section 5(a) and 5(c) of the Securities Act of 1933, as amended (Securities Act) by offering and selling securities by means of interstate commerce without having a registration statement filed or in effect with the SEC or qualifying for an exemption from SEC registration. The SEC states that SC2 offered and sold the NFTs as investment contracts, and therefore securities, under the Howey test, established in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (see Practice Note, Regulation of Crypto-Asset Securities in USA and Howey Test Flowchart).
According to the SEC, SC2 had a high-profile marketing campaign, which promoted the NFTs and highlighted benefits of owning the NFTs, including:
  • Exclusive access to Stoner Cats content, as well as access to other content that the Stoner Cats producers created in perpetuity.
  • Exclusive access to the Stoner Cats community, including events, contests, and opportunities to engage with the creators of the animated show.
  • The option for holders to resell the NFTs on the secondary market.
Additionally, the NFTs were configured so that SC2 received a 2.5% royalty for each transaction in the NFTs on a certain secondary market platform, which created an incentive for SC2 to encourage individuals to buy and sell the NFTs on the secondary market. SC2 marketing led investors to reasonably expect to profit based on SC2's managerial and entrepreneurial efforts.
Without admitting or denying the SEC allegations, SC2 agreed to:
  • Destroy all remaining Stoner Cats NFTs in its possession, custody, or control.
  • Publish notice of the order on SC2s website and social media.
  • Cease and desist from committing or causing any violations of Sections 5(a) and (c) of the Securities Act.
  • Pay a civil money penalty of $1,000,000 to the SEC.
SEC Commissioners Hester M. Peirce and Mark T. Uyeda issued a dissenting statement, noting that the mere fact that money was involved does not transform NFTs into securities. The dissent argues that the application of securities laws does not make sense in this case and instead the SEC should "lay out clear guidelines for artists and other creators who want to experiment with NFTs as a way to support their creative efforts and build fan communities."