Source: U.S. SEC official website Translation: Shanooba, LianGuai
Washington, D.C., September 13, 2023
The U.S. Securities and Exchange Commission (SEC) today charged Stoner Cats 2 LLC (SC2) with conducting an unregistered offering of cryptocurrency securities in the form of so-called non-fungible tokens (NFTs), raising approximately $8 million from investors to fund an animated web series called Stoner Cats.
According to the SEC’s order, on July 27, 2021, SC2 sold over 10,000 NFTs to investors at a price of approximately $800 each, selling out in 35 minutes. The order found that both before and after the sale of the Stoner Cats NFTs to the public, SC2’s marketing emphasized the specific benefits of owning these NFTs, including the option for owners to resell the NFTs on secondary markets. In addition, as part of the marketing campaign, the SC2 team highlighted its expertise as Hollywood producers, its knowledge of cryptocurrency projects, and the involvement of well-known actors in the web series, leading investors to expect profit from the potential increase in resale value of Stoner Cats NFTs on secondary markets due to the success of the web series. Furthermore, SC2 allocated 2.5% royalties for each NFT to provide for secondary market transactions of the NFTs and encouraged individuals to purchase and sell the NFTs, resulting in purchasers spending over $20 million in at least 10,000 transactions. The SEC’s order found that SC2 violated the registration provisions of the Securities Act of 1933 by offering and selling these cryptocurrency securities to the public without a registration statement or qualifying for an exemption from registration requirements.
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Gurbir S. Grewal, Director of the SEC’s Enforcement Division, stated, “Whether you’re offering beavers, otters, or animal-based NFTs, federal securities laws apply to decisions about whether something is an investment contract (i.e., a security) based on the underlying economic reality, not the labels or the items themselves.” He also stated, “Stoner Cats marketed its expertise in cryptocurrency projects, touted the potential increase in price of its NFTs, and took other steps to convince investors that they would profit from selling the NFTs on secondary markets. It is therefore not surprising, as alleged in the order, that Stoner Cats sold out all of its NFTs in just 35 minutes, raising over $8 million in revenue, with much of that being resold on secondary markets in a matter of months rather than being treated as collectibles.”
Carolyn Welshhans, Associate Director of the SEC’s Office of Investor Education and Advocacy, stated, “Registration of securities, including cryptocurrency securities, protects investors by providing disclosures so they can make informed investment decisions. Stoner Cats sought to enjoy the benefits of offering and selling securities to the public but failed to take on the accompanying legal responsibilities.”
Without admitting or denying the SEC’s findings, SC2 agreed to comply with the cease-and-desist order and pay a civil penalty of $1 million. The order establishes a fair fund for the return of funds to harmed investors who purchased the NFTs. SC2 also agreed to destroy all NFTs it owns or controls and to provide notice of the order on its website and social media channels.
The SEC’s investigation was conducted by the office’s David Frisof, Brian Fitzsimons, Antony Richard Petrilla, and Brian Quinn, with assistance from Carmen Taveras Alam, Donald Battle, James Carlson, Will Connolly, LianGuaitrick Costello, Howard Kaplan, Joshua Mallet, and Yongping Zheng. The case was overseen by Ms. Welshhans, as well as supervised jointly by David Hirsch, the director of the Crypto Assets and Cyber Unit, and Jorge Tenreiro, the deputy director.
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