On Sept 13, 2023, for its second non-fungible token (NFT) related enforcement action, the SEC issued a settled Order against Stoner Cats 2, LLC (“SC2”) for SC2’s offer and sale of 10,320 NFTs linked to images of characters from an animated web series called Stoner Cats.
The sale, which occurred on June 27, 2021, lasted 35 minutes and raised $8.2 million in ETH for the show. The NFTs began trading on the secondary market immediately; the smart contract for the NFTs was configured for SC2 to receive a 2.5% royalty from each resale.
The purpose of the sale was to fund the production of Stoner Cats, starring, among others, Ashton Kutcher, Chris Rock, Dax Shepard, Jane Fonda, 1 Michael Bublé, Mila Kunis, Seth McFarlane, and Vitalik Buterin. 2 The actors (and producers and other professionals on the project) were paid with the proceeds of the sale. The show’s logline: “Stoner Cats is a story of a woman who uses medical marijuana to alleviate her early Alzheimer’s symptoms and her beautiful family of cats who will do literally anything to save her.” Owners of the NFTs enjoyed exclusive access to watch the series on the internet.
The Order points to the fact that, despite advertising a limit of 20 per person, “investors” were able to buy as many Stoner Cat NFTs as they wished, with some purchasing hundreds; that SC2 minted an additional 100 Stoner Cats NFTs that it retained for itself; and that SC2 promoted the NFTs on its website, on social media, and through media interviews.
The SEC’s Order charged SC2 with the unregistered offer and sale of securities, in violation of §§ 5(a) and 5(c) of the Securities Act of 1933; required the company to destroy all Stoner Cats NFTs in its possession and assist with the administration of a fund for affected investors; and pay a $1 million civil penalty.
When the SEC brought its first NFT case, we at SKrypto noted it looked a lot like an old fashioned ICO, with old fashioned fungible tokens, and, in our view, the technology was kind of beside the point. This case feels different.
In a published dissent, Commissioners Peirce and Uyeda argue SC2’s conduct looks more like crowdfunding and, on the whole, we think they have the better argument. There is really nothing here that looks like a share or investment in an enterprise.
Admittedly, there was one tweet from the @StonerCatsTV account that encouraged people to “Buy More Eth & Sweep the Stoner Cats Floor,” suggesting the price will rise; another tweet touting the volume of Stoner Cat NFTs traded; and a statement from SC2 that “‘the more successful he show, the more successful your NFT’ will be.” From this, according to the Order, we are to conclude SC2 “led investors to expect profits from their entrepreneurial and managerial efforts, because a successful web series could cause the resale value of the Stoner Cats NFTs to rise in the secondary market.” I don’t know. The statements highlighted seem a thin reed on which to draw the distinction between a collectible or ticket, on the one hand, and a security, on the other, and the conclusion drawn concerning expectation of profits, in our view, is a stretch. At some point, anyone who will have wanted to watch the series, will have done so, as often as they like, and to their heart’s content, at which point the NFTs, at most, are fan collectibles.
Furthermore, other facts highlighted by the SEC to support its finding that the sale constituted an unregistered securities offering seem off the mark. For example, that the SC2 media campaign highlighted that “its team had the right credentials to execute the project plan…,” “the special skills and expertise the Stoner Cats team brought to the project…,” the team’s “expertise as Hollywood producers…,” and “the reputations of the animators, writers, and editors, whose credits included highly-regarded animated films.” Those all seem like things one would want and expect to know in connection with a good crowdfunding project.
Finally, the Order stated: “Investors were told that the Stoner Cats NFT was analogous to a ‘ticket’ and that ‘if people don’t appreciate it, you can take the ticket and sell it.’” Right. It was a ticket to watch the show. A ticket that could be used and reused, resold and reused because it was not a live show, it was web content. A ticket that scalpers might buy in bunches and resell on secondary markets at higher prices if the show is successful and popular.
Chairman Gensler has repeatedly stated that the SEC regulates outcomes not technology and using blockchain technology itself does not affect its actions. So what separates this enforcement action from artists selling tickets to performances via Ticketmaster, SeatGeek, and other platforms? Is it the few, unfortunate, public statements by SC2 suggesting the price of the NFTs may rise if their show was successful? Or is it the fact that the SEC staff is under pressure to bring a bunch of NFT cases at once and it would have been economically irrational for these Stoner Cats to litigate instead of settle with a stretch and a yawn? 3
1 This is the order the stars are listed on the Stoner Cats website. As a person of a certain age, naturally, I would have listed Jane Fonda first. It is also worth noting that this is not the first time Ms. Fonda has played a Cat on the screen.
2 One of these things is not like the other.
3 If you now feel inspired to spend 15 minutes looking at stretching cats, click here.