The US SEC 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 $8m from investors to finance the animated web series.

The NFT-financed cartoon series, also called Stoner Cats, features the vocal talents of celebrities Ashton Kutcher, Mila Kunis, Chris Rock, Jane Fonda, Seth MacFarlane, and others.

The SEC says SC2 conducted an unregistered offering of 10,320 NFTs to investors for approximately $800 each, selling out in 35 minutes on July 27, 2021.

SC2 will pay a $1m civil fine without admitting or denying any wrongdoing in settling the charges, and it agreed to destroy all NFTs in its possession.

NFT market

The SEC’s order says 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.

As part of the marketing campaign, the SC2 team emphasized its expertise as Hollywood producers, its knowledge of crypto projects, and touted 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, the SEC said.

SC2 told investors that “the more successful the show, the more successful your NFT” and gave them exclusive access to watch “Stoner Cats” online, plus personalized “Stoned Cat” avatars.

“Using the analysis of today’s enforcement action, the SEC should have parachuted in to save those kids from Star Wars mania.”

SEC Commissioners Hester Peirce and Mark Uyeda

SC2 configured the Stoner Cats NFTs to provide SC2 a 2.5% royalty for each secondary market transaction in the NFTs and it encouraged individuals to both buy and sell the NFTs, leading purchasers to spend more than $20m in those 10,320 transactions in just 35 minutes, selling out the entire supply.

According to the SEC’s order, SC2 violated Sections 5(a) and 5(c) of the Securities Act by offering and selling these crypto asset securities to the public in an unregistered offering that was not exempt from registration.

Stoner Cats’ escapades

Stoner Cats is an animated series geared to adults that follows the zany escapades of cats who acquire the gift of speech after a dose of medical marijuana.

Six episodes were released from July 2021 to December 2022 featuring the voice talents of the actors mentioned above, although it’s important to note that the celebrities are not named in the SEC’s order, and there has been no mention of charges being brought against them.

Celebrity brand ambassadors have faced some heat for their endorsements, though.

Kim Kardashian

Last October, the SEC charged Kim Kardashian for promoting a crypto asset security from EthereumMax on her social media account without revealing she was paid to do so.

And 16 celebrity finfluencers touting the now-bankrupt cryptocurrency exchange FTX were sued by the Moskowitz Law Firm for allegedly deceptively touting FTX back in May.

In late June, the Federal Trade Commission issued an update to its guidelines for endorsements that advise businesses about how to make sure consumers understand when celebrities, influencers or even everyday consumers are compensated to promote or review their products.

Star Wars

“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.

“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,” said Carolyn Welshhans, Associate Director of the SEC’s Home Office.

SC2 told investors that “the more successful the show, the more successful your NFT”.

SEC Commissioners Hester Peirce and Mark Uyeda joined together to issue a dissent to the consent order, saying “[t]his enforcement action involves activity that we believe constitutes fan crowdfunding – a common phenomenon in the world of artists, creators, and entertainers”.

Enhanced for the digital age, the Stoner Cats NFTs are not that different from the Star Wars collectibles sold in the 1970s, they said. “Using the analysis of today’s enforcement action, the SEC should have parachuted in to save those kids from Star Wars mania,” they said.

They agree that NFT creators and other artists should not get a free pass from application of the securities laws, but they said applying them here “makes little sense and discourages content creators from exploring ways to harness social networks to create and distribute content”.