In a recent move that intensifies the Securities and Exchange Commission’s (SEC) crackdown on the Non-Fungible Token (NFT) sector, the SEC has charged Stoner Cats 2 (SC2) with conducting an “unregistered offering of crypto assets.”
The suit specifically targets Stoner Cats’ sale of non-fungible tokens, which raised approximately $8 million from investors to finance the production of an animated web series.
The SEC legal earthquake hits the NFT market again
The SEC order shows that on July 27, 2021, SC2 sold more than 10,000 NFTs to investors for approximately $800 each, with the entire offering selling out in just 35 minutes. The SEC claims that SC2’s marketing campaign highlighted the potential benefits of owning the NFTs, including allowing owners to resell them on the secondary market.
Furthermore, the SEC alleges that SC2 emphasized the expertise of Hollywood producers, knowledge of crypto projects, and involvement of well-known actors in the web series, which led investors to anticipate profits from the potential increase in resale value.
According to the SEC, SC2 has configured the NFTs to offer a 2.5% royalty on every secondary market transaction, incentivizing individuals to buy and sell the NFTs. Buyers then allegedly completed more than 10,000 transactions, totaling more than $20 million.
The SEC alleges that SC2 violated the Securities Act of 1933 by offering and selling these SEC-denominated “crypto asset securities” to the public without registering the offering or qualifying for an exemption.
Gurbir S. Grewal, director of the SEC’s Division of Enforcement, emphasizes that the determination of whether an investment contract qualifies as security depends on the economic substance of the offering, not the labels attached to it. Grewal stated:
Here, the SEC’s order shows that Stoner Cats marketed its knowledge of crypto projects, touted that the price of their NFTs could rise, and took other steps that led investors to believe they would profit from the selling the NFTs on the secondary market.
Stoner Cats settles the suit and agrees to destroy the NFT
While the SEC’s actions are intended to “protect investors” by ensuring proper disclosure, some critics argue that the SEC’s language and terminology surrounding the NFT market is biased and unclear.
Crypto enthusiast and investor Adam Cochran expressed his concerns, emphasizing that there is no such thing as an “unregistered offering of NFTs,” as registration requirements typically apply to securities. Cochran believes the SEC’s communications must accurately reflect the law to avoid a chilling effect through fear-mongering.
In response to the allegations, SC2 has agreed to a cease and desist order and a civil penalty of $1 million. The order also establishes a Fair Fund to return money to injured investors who purchased the NFTs.
Additionally, SC2 has committed to destroying all NFTs in its possession or control and publishing notice of the order on its website and social media channels.
The SEC’s lawsuit against Stoner Cats underscores the ongoing regulatory battle surrounding the NFT sector. As the industry evolves, stakeholders are calling for clearer guidelines and unbiased regulatory practices to strike a balance between investor protection and promoting innovation in digital assets.