The Securities and Exchange Commission has charged Stoner Cats 2 LLC (SC2) with conducting an unregistered offering of crypto asset securities in the form of purported non-fungible tokens (NFTs) that raised approximately $8 million from investors to finance an animated web series called Stoner Cats, according to an SEC release.
Mila Kunis (That 70’s Show, Family Guy, Bad Moms) teamed with Chris Cartagena (The Grinch), Sarah Cole (Spider-Man: Into the Spider-Verse), and Ash Brannon (Toy Story 2) under the Orchard Farm Productions banner, to create the show, which features a bunch of weed smokin’ felines. Stoner voice talent includes Kunis as Fefe, Seth MacFarlane as Dave/Reginald, Ashton Kutcher as Baxter, Jane Fonda as Ms. Stoner, Vitalik Buterin as Lord Catsington, and Chris Rock as Hamilton.
The first episode of the series was released as 10,420 NFTs on July 28, 2021, which sold out within 30 minutes. Each was sold for .35 ETH, adding up to approximately $8 million. The experimental series’ Manifesto explains, “At Stoner Cats we believe that storytellers deserve an outlet where they can be valued and supported without having to bow to the machine of big media. So, we’re tilting the model on its head and testing a new architecture using NFTs that can connect storytellers directly with their audience and essentially decentralize content production.”
The SEC order finds that both before and after Stoner Cats NFTs were sold to the public, SC2’s marketing campaign highlighted specific benefits of owning them, including the option for owners to resell their NFTs on the secondary market. In addition, the order finds that, as part of the marketing campaign, 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 Cats NFTs in the secondary market to rise. Further, the order finds that SC2 configured the Stoner Cats NFTs to provide SC2 a 2.5 percent royalty for each secondary market transaction in the NFTs and it encouraged individuals to buy and sell the NFTs, leading purchasers to spend more than $20 million in at least 10,000 transactions.
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.
“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,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. The Grewel added, “Here, the SEC’s order finds that Stoner Cats marketed its knowledge of crypto projects, touted that the price of their NFTs could increase and took other steps that led investors to believe they would profit from selling the NFTs in the secondary market. It’s therefore hardly surprising, as the order finds, that Stoner Cats sold its entire supply of NFTs in just 35 minutes, generating proceeds of over $8 million, most of which were then resold – not held as collectibles — in the secondary market within months.”
“Registration of securities, including crypto asset securities, protects investors by providing them with disclosures so they can make informed investing decisions,” said Carolyn Welshhans, Associate Director of the SEC’s Home Office. “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.”
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.
The SEC’s investigation was conducted by David Frisof, Brian Fitzsimons, Antony Richard Petrilla, and Brian Quinn of the Home Office, with assistance from Carmen Taveras Alam, Donald Battle, James Carlson, Will Connolly, Patrick Costello, Howard Kaplan, Joshua Mallet, and Yongping Zheng. The case was supervised by Ms. Welshhans, as well as by Crypto Assets and Cyber Unit Chief David Hirsch and Deputy Chief Jorge Tenreiro.
According to The Hollywood Reporter, neither Kunis nor Kutcher have responded for a request to comment.
Source: The SEC