Stoner Cats 2 LLC has been charged by the Securities and Exchange Commission (SEC) for pursuing an unregistered securities offering with the issuance of non-fungible tokens (NFTs). This is the second enforcement action targeting an NFT issuer as it broadens its targets in the digital asset sector.
The SEC states that in July of 2021, Stoner Cats sold over 10,000 NFTs at $800 each. The NFT offer sold out in just 35 minutes. The SEC claims that in reality these NFTs were securities as they were marketed as benefitting from trading on secondary platforms where there was the potential of generating a gain in value.
Stoner Cats garnered the support of some well-known influencers/actors, including Mila Kunis. The complaint states:
“The NFTs were promoted on StonerCats.com and on social media, including on podcasts, YouTube, Twitter, Instagram, and Discord as well as during interviews on prominent network and cable television shows.”
Six episodes of Stoner Cats were created, which were made available only to NFT holders, according to the Stoner website, which explains:
“Just like its digital collectible NFTs, we believe the Stoner Cats content should live on the blockchain and be accessible for many generations to come. This website and Stoner Cats content will be available in perpetuity using decentralized hosting and archiving service Arweave. We do not control the content and the content can never be removed.”
The SEC says that there were over 10,000 transactions in the secondary markets generating $20 million in transaction value. Each transaction generated a 2.5% royalty for Stoner Cats.
SEC Director of Enforcement Gurbir S. Grewal said whether the NFT offering is for beavers or chinchillas, it is the economic realities of the offering.
“Here, the SEC’s order finds that Stoner Cats marketed its knowledge of crypto projects, touted that the price of their NFTs could increase, and took other steps that led investors to believe they would profit from selling the NFTs in the secondary market. It’s therefore hardly surprising, as the order finds, that Stoner Cats sold its entire supply of NFTs in just 35 minutes, generating proceeds of over $8 million, most of which were then resold – not held as collectibles — in the secondary market within months.”
Carolyn Welshhans, Associate Director of the SEC’s Home Office, added that registration of securities and the required disclosures protect investors.
“Stoner Cats wanted all the benefits of offering and selling a security to the public but ignored the legal responsibilities that come with doing so.”
Without admitting or denying guilt, Stoner Cats has agreed to pay a penalty of $1 million as well as a cease and desist. It is uncertain if this means the decentralized content will remain available.
