The U.S. Securities and Exchange Commission has ordered the creators of the NFT-backed animated series Stoner Cats to pay $1 million for conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs).
What is Stoner Cats? Stoner Cats is an animated series about house cats that become sentient after exposure to medical marijuana. Six episodes and a holiday special were put online between July 2021 and December 2022. To finance the production, organizers created 10,420 NFTS and raised $8 million by selling them. According to the SEC’s release, the tokens sold out in 35 minutes.
What did the SEC say about the project? In a release, the SEC says that the LLC’s organizers billed their campaign so that investors would expect “profits because a successful web series could cause the resale value of the Stoner Cats NFTs in the secondary market to rise.” During its investigation, the SEC also found that the NFTs had been configured to return a 2.5 percent royalty to the LLC for each secondary market transaction and that the LLC encouraged individuals to buy and sell the tokens to increase those royalties. According to the SEC, the organizers had violated the Securities Act of 1933 by offering and selling asset securities to the public in an unregistered offering.
Said Gurbir S. Grewal, director of the SEC’s Division of Enforcement:
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. 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.
Any dissent? Two of the five SEC commissioners who ruled on this case, both Republicans, released a joint statement saying that the organization was overstepping. They argued:
Whether an artist is selling numbered versions of physical prints for fans to display on their walls or NFTs for fans to display on social media, she deserves clear guidance about whether and how the securities laws apply. Artists of all kinds have long struggled to support themselves, and NFTs offer a potentially viable way for them to monetize their talents. The fact that money is involved does not transform NFTs into securities.
How did the LLC respond? According to the SEC, the Stoner Cats 2 LLC didn’t admit or deny its findings but agreed to a cease-and-desist order and to pay the $1 million. The LLC will also establish a fund to return money to investors affected by the situation, and will destroy all NFTs related to the series that are in its possession or control. Stoner Cats 2 LLC must also post a public notice about the SEC’s order.
Who was involved with the production? Stoner Cats was created, written, and directed by Chris Cartagena (editor, Illumination’s The Grinch), Sarah Cole (editorial department, Spider-Man: Across the Spider-Verse), and Emmy-winning and Oscar-nominated writer-director-producer Ash Brannon (writer/co-executive producer of Arcane; co-director of Toy Story 2, and director/co-writer of Surf’s Up). The show was developed and produced with Mila Kunis’ Orchard Farm Productions, and Kunis is listed as part of the “Production Team” and “Blockchain Team” on the Stoner Cats website. Other producers include Lisa Sterbakov, Cami Curtis, and Brendan McNerney. The Blockchain team also includes Maaria Bajwa, Morgan Beller, and Lisa Sterbakov.
And on the creative side? The series had some serious animation firepower behind it. It was animated by Brannon with character layout and storyboarding from Disney and Pixar vet Dan Jeup (character animator Oliver & Company, The Little Mermaid). San Francisco-based animation studio Ghostbot handled the majority of the production work.
The series boasts an A-list voice cast featuring Kunis, Seth MacFarlane, Ashton Kutcher, Chris Rock, Dax Shepard, Gary Vaynerchuk, Jane Fonda, Michael Buble, and Vitalik Buterin, as well as a glut of guest stars.
More to come? The SEC is targeting groups that produce or trade digital assets, arguing that they are similar enough to stocks or bonds that they must be similarly overseen by the SEC. This is the second time the SEC has fined an NFT organization since launching its crackdown on the tokens. In August, the Commission fined L.A.-based media company Impact Theory $6 million for an unregistered NFT offering.