The regulators are blazing a trail in NFTs.
The Stoner Cats NFTs, associated with a cartoon including the voice talent of Mila Kunis and Ashton Kutcher, were actually unregistered securities, the Securities and Exchange Commission said today. The company behind the NFTs, called Stoner Cats 2, paid $1 million in fines and agreed to destroy all of the NFTs in its possession without admitting guilt.
This is the second action the SEC has taken against NFTs, and unlike the last one, it may have broad consequences for the industry. Between the two cases, the SEC is “drawing a picture where all NFTs are within their jurisdiction,” says Hermine Wong, the former head of policy at Coinbase and a former SEC regulator. The order is likely to have a chilling effect on the industry, she says.
The purpose of the Stoner Cat NFTs was to fund an animated web series, also called Stoner Cats, the SEC says. Stoner Cats 2 “offered and sold the Stoner Cats NFTs as an investment into SC2’s efforts to create this content,” the SEC order says. Six episodes of the show were produced — and only those who had the NFTs could view the show.
Though no individuals are named in the order, Kunis’ production company was involved in creating the web series and forming “a formidable collective of voice talent, animators, and creatives of all kinds to come together with technology and NFT experts (including the brilliant minds behind CryptoKitties) to bring this story to life using NFTs,” according to the Stoner Cats website.
Funds from the NFTs were used to pay the voice cast, the SEC order says. That talent included Kutcher, Kunis, Chris Rock, Jane Fonda, NFT influencer Gary Vaynerchuk, and Ethereum founder Vitalik Buterin, among others. The money raised from NFTs also paid management, producers, and others associated with the show. “Investors were also told that ‘the more successful the show, the more successful your NFT’ will be,” the order says.
The SEC order also zeroes in on the Stoner Cats’ royalties, and this is the part that is particularly troublesome for other NFT projects. The Stoner Cats NFTs were configured so that whenever one of the NFTs was resold, Stoner Cats 2 received a 2.5 percent royalty. “The royalties created incentives for SC2 to encourage individuals to buy and sell the Stoner Cats NFTs in the secondary market,” the order reads. “If the Stoner Cats show was successful, the price of the NFTs could rise and so could the amount of royalties.”
Royalties are associated with many NFT projects and are among the draws for artists who might consider NFTs. In the ordinary art market, an artist receives nothing from the resale of their work — and the possibility of getting a cut when their work was resold was a big draw. Some exchanges, such as OpenSea, have dropped the royalty cut completely.
“Even more troubling is how artists and creators are supposed to interpret this,” says Wong. The SEC didn’t issue guidance about what royalties might count as a violation of securities law, so a reasonable person might assume all royalties are in violation.
SEC Commissioners Hester Peirce and Mark Uyeda dissented from the enforcement action, saying that the SEC should lay out clear guidelines for artists. “This enforcement action involves activity that we believe constitutes fan crowdfunding,” they wrote in their dissent. They compared the Stoner Cats NFTs to Star Wars collectibles sold in 1977, which promised future action figures. Those Star Wars collectibles, however, didn’t offer royalties upon resale to Lucasfilm, which seems like a significant difference.