The Securities and Exchange Commission (SEC) has taken action against Stoner Cats 2 LLC (SC2) for allegedly conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs). The offering, which raised approximately $8 million from investors, was intended to finance an animated web series known as “Stoner Cats.”
SEC’s Stoner Cats 2 Scrutiny
According to the SEC’s order, on July 27, 2021, SC2 offered and sold over 10,000 NFTs to investors at a price of approximately $800 each, with the entire offering selling out in just 35 minutes. The SEC alleges that SC2’s marketing campaign emphasized the benefits of NFT ownership, including the option for purchasers to resell their NFTs on the secondary market. The campaign also highlighted the expertise of the SC2 team as Hollywood producers, their knowledge of crypto projects, and the involvement of well-known actors in the web series. These marketing efforts allegedly led investors to anticipate profits because a successful web series could increase the resale value of the Stoner Cats NFTs in the secondary market.
Furthermore, 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 involving the NFTs. SC2 encouraged individuals to buy and sell the NFTs, resulting in purchasers spending more than $20 million across at least 10,000 transactions. The SEC asserts that SC2 violated the Securities Act of 1933 by offering and selling these crypto asset securities to the public in an unregistered offering that did not qualify for an exemption from registration.
SC2’s Compliance and Penalties
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized that “the economic reality of the offering” determines whether it qualifies as an investment contract and, therefore, a security. He noted that Stoner Cats marketed its knowledge of crypto projects and the potential price increase of its NFTs, which led investors to believe they could profit from secondary market sales.
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Without admitting or denying the SEC’s findings, SC2 has agreed to a cease-and-desist order and a civil penalty of $1 million. Additionally, a Fair Fund will be established to reimburse injured investors who purchased the NFTs. SC2 will destroy all NFTs under its control and publish notice of the SEC’s order on its website and social media channels. The SEC’s investigation was carried out by a team of experts and supervised by Carolyn Welshhans, Associate Director of the SEC’s Home Office, Crypto Assets and Cyber Unit Chief David Hirsch, and Deputy Chief Jorge Tenreiro.