Yesterday, in one other blow to the viability of NFTs and crypto, the Securities and Alternate Fee (SEC) launched a settlement with Stoner Cats 2, LLC, an NFT undertaking designed to boost cash to cowl some manufacturing prices for a cartoon collection underneath the identical title. We’ve beforehand written on the subject of the SEC’s investigation and anticipated enforcement actions in opposition to NFT (nonfungible token) initiatives. See earlier articles right here, right here and right here.
The background of this undertaking is simple. In July 2021, Stoner Cats bought 10,320 NFTs to the general public for ether valued as much as $8.2 million. The aim of the NFT providing was to advertise an animated collection about an aged lady with a most cancers prognosis who lived in NYC and used medical marijuana in connection along with her therapy. Her 5 cats—the Stoner Cats—had been the primary function of the present. The collection featured animations from Chris Cartagena and voiceovers from celebrities like Jane Fonda, Mila Kunis, Ashton Kutcher, Dax Shepard, Chris Rock and Seth McFarlane. The aim of the NFT was to advertise the present and to offer a form of memorabilia for its followers.
The SEC alleges that the NFTs, which contained reproductions of the Stoner Cats’ photographs, was an funding contract. The SEC cites tweets from the present’s promoters throughout that point suggesting that “the neatest factor to do throughout a dip within the crypto markets could be to
‘Purchase extra ETH & sweep the Stoner Cats flooring.’” Order, 5, ¶ 21. This created an expectation of revenue for the NFT collectors, in keeping with the SEC. Id. at 5, ¶ 19.
In reference to the settlement, Stoner Cats agreed to a civil financial penalty of $1 million, along with destroying any Stoner Cat NFTs it nonetheless has in its possession. Id. at 8, ¶ C. The corporate additionally agreed to work with the SEC to distribute the penalty as financial reduction to “affected buyers.” Id. at 7, ¶ 26(c).
Maybe extra fascinating is the dissent from Commissioners Hester Pierce and Mark Uyeda. They argue the SEC has failed to tell apart between odd memorabilia and promotional materials from blockchain-based collectibles:
Whether or not an artist is promoting numbered variations of bodily prints for followers to show on their partitions or NFTs for followers to show on social media, she deserves clear steering about whether or not and the way the securities legal guidelines apply. Artists of every kind have lengthy struggled to help themselves, and NFTs provide a probably viable manner for them to monetize their abilities. The truth that cash is concerned doesn’t remodel NFTs into securities.
They additional draw an analogy between the restricted version tokens that had been launched on the heels of the Star Wars 1977 launch, which had been redeemable for future editions Luke Skywalker, Princess Leia, and R2-D2 motion figures to be the equal to the trendy day NFT. They argue:
In making use of the securities legal guidelines on this house…, the Fee should take care to protect the flexibility of artists to promote their work, construct a fan base, and contain that fan base in future inventive endeavors. That’s what was occurring within the Seventies with Star Wars, and that’s what was occurring right here with Stoner Cats. …The Fee’s utility of the securities legal guidelines right here makes little sense and discourages content material creators from exploring methods to harness social networks to create and distribute content material. Extra typically, it contributes to the authorized ambiguity dealing with artists, writers, musicians, filmmakers, and others in search of to construct a loyal, engaged following.
With public experiences of different high-profile NFT investigations, one can anticipate this can be the primary of a number of enforcement actions on this house. Following SEC Chair Gary Gensler’s testimony to the U.S. Senate on Sept. 12, 2023, during which he mentioned he would search further funds for elevated crypto enforcement, the subsequent few months could also be a difficult interval for NFT artists, creators and initiatives.