The SEC’s ‘unregistered securities’ claim against Stoner Cats cartoon | Credit: Shutterstock
Key Takeaway
- Stoner Cats was an exclusive animated series funded through NFT sales.
- The SEC claimed the proceedings from NFT sales were ‘unregistered securities.’
- The commission does not see TV show merch as securities.
The US Securities and Exchange receives constant criticism for its harsh approach to the digital asset market. Under the leadership of Gary Gensler, many crypto institutes found themselves on the receiving end of the SEC’s legal offense, mainly on the basis of the illegal trade of unregistered securities.
However, several cases such as the Ripple/XRP case have proven the SEC’s approach to be less-than-accurate, with some calling it “arbitrary and capricious”.
Preston Byrne, a partner at Brown Rudnick law firm, shared a story about Stoner Cats, an exclusive animated series funded through NFT sales that fell victim to the SEC’s ‘unregistered securities’ claim.
Stoner Cats
The animated show starred Ashton Kutcher and Mila Kunis and revolved around a bunch of house cats who like to smoke marijuana. But the crux of the show was that it was funded through NFT sales.
“SC2 told investors it would develop the Stoner Cats web series based upon the managerial and entrepreneurial efforts of SC2 and its agents.”
“SC2 promised investors in the Stoner Cats NFTs exclusive access to the web series and an online community, as well as access to unspecified, future entertainment content,” said Byrne.
Essentially, SC2, the studio behind Stoner Cats, sold merch from the series in NFT form.
The studio offered the NFTs as a form of investment to gain access to content, and the show’s potential success drew in investors who sought profit from the managerial and entrepreneurial efforts of SC2.
Investors were not allowed to choose which NFT they would receive after making the purchase although each NFT featured a different character from the show, with different facial expressions, outfits, and backgrounds.
According to Byrne, “Over 62% of the purchasers in the offering bought more than one Stoner Cats NFT.
In addition, at least 20% of the Stoner Cats NFTs purchased in the offering were resold in the secondary market before the first episode of the Stoner Cats series aired, two days after the offering, and the majority of the NFTs purchased in the offering were resold in the secondary market before the release of the second episode on November 15, 2021.”
SC2 also promised that if 100% of the NFTs offered were sold, the studio would create a decentralized autonomous organization (DAO) comprised of Stoner Cats NFT holders.
Moreover, SC2 promised it would “develop at least one new animation project a year for the next three years,” which NFT holders would have access to.
As an extra form of income, SC2 gave itself a 2.5% sale royalty fee.
What Happened?
Just by mentioning the SEC, anyone can anticipate how this story will go.
The SEC charged the studio SC2 for selling unregistered securities in the form of NFTs for Stoner Cats.
According to the claim,
SC2 encouraged NFT holders to invest in the studio’s products just to resell them on the secondary market. The SEC also believes that SC2 should not have flaunted their Hollywood expertise and their crypto knowledge. On top of that, the commission sees SC2 at fault for collecting a 2.5 percent royalty for each secondary market transaction.
“According to the SEC’s order, SC2 violated the Securities Act of 1933 by offering and selling these crypto asset securities to the public in an unregistered offering that was not exempt from registration.”
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement humorously said “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.”
He also added, “Stoner Cats wanted all the benefits of offering and selling a security to the public but ignored the legal responsibilities that come with doing so.”
What’s Wrong With The SEC’s Decision?
Byrne points out the hypocrisy in the SEC’s decision on Stoner Cats.
“So here’s what gets me about this. Buying film stills from a movie is a thing that happens.”
“The SEC appears to be saying that if you sell these stills before you produce a web series – say, by selling stills from the pilot – you’re now selling securities.”
Byrne cites the example of Netflix which sold NFTs for its popular show Love, Death + Robots. Once again, the SEC did not see such products as securities.
The point Byrne is trying to make is that the SEC is not consistent when it comes to when a show’s merch becomes a security. In the case of films, stills are sold after a movie is screened. In Netflix’s example, the studio started selling NFTs before the season was over.
“When is a show “complete” and NFT sales of stills are therefore permitted? After the pilot? After the first season? Second season? First run? Spinoff? Sequel? When, exactly, is an artist allowed to sell an NFT representing a good which is already routinely sold as a collectible all over the Internet without it becoming a security?”
Byrne even brought up the example of Mattel, a shop that sells dolls from the popular movie, Barbie. Once again, the SEC did not make a move against the shop nor the studio behind Barbie.
What Happened To Stoner Cats?
According to the SEC’s press release , “Without admitting or denying the SEC’s findings, SC2 agreed to a cease-and-desist order and to pay a civil penalty of $1 million.
The order establishes a Fair Fund to return monies that injured investors paid to purchase the NFTs. SC2 also agreed to destroy all NFTs in its possession or control and publish notice of the order on its website and social media channels.”
SC2 did not immediately respond to a request for comment.