The SEC Imposes $1 Million Fine on Stoner Cats NFTs Creator for Securities Violation

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Last Updated on March 19, 2024 by newseditor

According to reports from the US SEC, Stoner Cats 2 LLC (SC2) conducted an unregistered offering of cryptocurrency asset securities in the form of allegedly non-fungible tokens, which raised about $8 million from investors to fund the Stoner Cats animated web series.

Stoner Cats Non-Fungible Tokens’ Unregistered Offering: Securities and Exchange Commission’s Findings and Penalties

The Securities and Exchange Commission order states that on July 27, 2021, SC2 offered and sold to investors more than 10,000 NFTs for about $800 each and that the stock sold out in under 35 minutes. The order concludes that SC2’s marketing effort promoted particular advantages of having Stoner Cats NFTs, including the possibility for owners to resell their NFTs on the secondary market, both before and after the Stoner Cats NFTs were sold to the general public.

In addition, the court ruled that the SC2 team’s marketing efforts highlighted their experience as Hollywood producers, their familiarity with crypto projects, and the well-known actors who would be appearing in the web series. This gave investors reason to believe they would profit because a popular web series would increase the value of Stoner Cats NFTs on the secondary market.

The order further states that SC2 encouraged people to buy and sell the NFTs, resulting in buyers spending more than $20 million in at least 10,000 transactions, and that SC2 set the Stoner Cats NFTs to grant SC2 a 2.5 percent royalty for each secondary market transaction in the NFTs. By marketing and selling these digital asset securities to the general public in an unregistered offering that was not exempt from registration, SC2 allegedly violated the Securities Act of 1933, according to the SEC’s ruling.

According to Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, the determination of whether an offering constitutes an investment contract and, thus, security under federal securities laws relies on the economic reality of the offering rather than the labels used or the underlying objects.

Based on the Securities and Exchange Commission order, Stoner Cats promoted its understanding of crypto projects, predicted possible NFT price hikes, and took measures that caused investors to anticipate profits from secondary market NFT sales. As a result, it’s not a surprise that Stoner Cats quickly sold its entire NFT supply, producing over $8 million in revenues, the majority of which were immediately resold in the secondary market instead of being held as collectibles within months, as per the order.

Carolyn Welshhans, Associate Director of the SEC’s Home Office, stressed that the registration of securities, including crypto-asset securities, protects investors by providing them with important information that allows them to make well-informed investment decisions. She stated the Stoner Cats intended to maximize the benefits of openly offering and selling securities while ignoring the legal obligations that go along with such conduct.

Without opposing or confirming the SEC’s conclusions, SC2 consented to a cease-and-desist order and a $1 million civil penalty. The order creates a Fair Fund to reimburse money lost by injured investors who bought non-fungible tokens. Additionally, SC2 consented to delete all non-fungible tokens that it owns or controls and to post notice of the directive on its website and social media accounts.

Takeaways

The SEC’s enforcement action against Stoner Cats NFTs creator highlights the importance of adhering to securities regulations in the crypto space to protect its users and investors and maintain market integrity.

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