On 13 November 2024, the United States Securities and Exchange Commission issued an Order appointing fund administrator, setting administrator’s bond amount, and authorizing the approval and payment of fees and expenses of administration. Initially, on 13 September 2023, the United States Securities and Exchange Commission initiated cease-and-desist proceedings against Stoner Cats 2, LLC, a company known for its production and sale of animated series-related non-fungible tokens (NFTs). The United States Securities and Exchange Commission found that Stoner Cats 2 had conducted an unregistered offering of crypto asset securities through the sale of Stoner Cats NFTs on 27 July 2021.
Stoner Cats 2, LLC is the entity behind the “Stoner Cats” animated series. To fund the project, Stoner Cats 2 offered 10,320 NFTs to the public, each priced at 0.35 ETH, approximately $800 at the time. The entire offering sold out within 35 minutes, yielding gross proceeds in Ethereum valued at approximately $8.2 million. Despite the significant financial and promotional success, the United States Securities and Exchange Commission determined that the sale of these NFTs constituted an unregistered securities offering, as Stoner Cats 2 did not register the NFT sale with the United States Securities and Exchange Commission, nor did it qualify for any exemption from registration.
On 27 July 2021, Stoner Cats 2 launches its NFT sale, offering 10,320 tokens related to its animated series. On 13 September 2023, the United States Securities and Exchange Commission issues an order instituting cease-and-desist proceedings against Stoner Cats 2 for violating securities registration requirements. On 13 November 2024, the United States Securities and Exchange Commission formalizes the appointment of Epiq Class Action and Claims Solutions, Inc. as the fund administrator responsible for distributing a Fair Fund created from the penalties collected from Stoner Cats 2.
The United States Securities and Exchange Commission found Stoner Cats 2 in violation of Sections 5(a) and 5(c) of the United States Securities Act of 1933. Section 5(a) mandates that entities must register securities offerings with the United States Securities and Exchange Commission before making them available to the public, while Section 5(c) prohibits the solicitation of securities without a registration statement in effect. The United States Securities and Exchange Commission deemed the Stoner Cats NFTs as “crypto asset securities,” subject to the same regulatory standards as traditional securities, resulting in a $1 million civil penalty for Stoner Cats 2.
To redress the impact on investors, the United States Securities and Exchange Commission established a Fair Fund under Section 308(a) of the United States Sarbanes-Oxley Act of 2002. The Fair Fund, sourced from the $1 million penalty, will be distributed among affected investors through a designated account managed by the United States Department of the Treasury. Epiq Class Action and Claims Solutions, Inc., approved by the United States Securities and Exchange Commission, were appointed to administer the fund distribution. The fund administrator’s expenses and fees will be paid from the Fair Fund, capped at a pre-approved budget.
This United States Securities and Exchange Commission action against Stoner Cats 2 shows the Commission’s stance on NFTs and crypto assets that resemble traditional securities. The United States Securities and Exchange Commission has asserted its regulatory authority over NFTs offered with characteristics akin to investment contracts, thus subjecting them to securities laws. For entities involved in crypto and NFT offerings, this case signals that unregistered securities sales, even if packaged as digital or creative assets, may face strict enforcement actions if they exhibit characteristics aligning with securities definitions under United States law.
The United States Securities and Exchange Commission’s enforcement actions are often based on the underlying features of the crypto asset offerings. In the case of Stoner Cats NFTs, the United States Securities and Exchange Commission highlighted the following factors that qualified the NFTs as securities:
- Expectation of Profit: Investors were likely motivated by the potential for increased resale value of the NFTs, suggesting profit-oriented intent.
- Common Enterprise: The funds raised by Stoner Cats 2 were pooled to finance the animated series, creating a common enterprise where the NFT buyers’ fortunes were intertwined with the project’s success.
- Promotional Efforts: Stoner Cats 2 emphasized the scarcity and resale potential of the NFTs, which likely contributed to the perception of these tokens as investments rather than collectibles.
(Source: https://www.sec.gov/files/litigation/admin/2024/34-101610.pdf, https://www.sec.gov/newsroom)
