Federal regulators have charged the founders of the Stoner Cats NFT collection with selling unregistered securities. How long before the SEC comes after music NFTs?
The SEC charged Stoner Cats 2 LLC with conducting the offering of unregistered securities for sale in the form of NFTs, raising around $8 million from investors to finance the cartoon called ‘Stoner Cats.’
The SEC says the founders offered and sold to investors more than 10,000 NFTs for $800 each, selling out within 35 minutes. The order finds that before and after marketing these NFTs to the public, the Stoner Cats marketing campaign highlighted the benefits of ownership—including the ability to resell the NFTs on the secondary market.
“The SC2 team emphasized its expertise as Hollywood producers, its knowledge of crypto projects, and the well-known actors involved in the web series, leading investors to expect profits because a successful web series could cause the resale value of the Stoner Cat NFTs in the secondary market to rise,” the SEC report reads.
The cast of the animated web series included Ashton Kutcher, Chris Rock, Dax Shepard, Gary Vaynerchuk, Jane Fonda, Michael Buble, Mila Kunis, Seth MacFarlane, and Ethereum founder Vitalik Buterin.
The Stoner Cats NFTs were configured to provide a 2.5% royalty for each secondary market transaction, encouraging individuals to buy and sell the NFTs. The SEC order says those purchasing these items spent over $20 million across 10,000 transactions.
“Regardless of whether your offering involves beavers, chinchillas, or animal-based NFTs, under the federal securities laws, it’s the economic reality of the offering—not the labels you put on it or the underlying objects—that guides the determination of what’s an investment contract and therefore a security,” says Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. That statement may present some problems for music NFTs that raised cash at the height of the NFT boom in 2021.
Much of what the Stoner Cats NFTs promised to its investors, relaunched web3 music services like Limewire have also promised to investors. Will these services soon be in the SEC regulators sights?
Founders of the re-launched Limewire created the LMWR token that “enables its holders to make purchases on the platform, earn staking activity, and royalty rewards and execute voting rights,” the offering states. The founders also offered an NFT collection called ‘LimeWire Originals’ in 2022 described as “the highest level of membership the LimeWire community has to offer.”