The Securities and Exchange Commission (SEC) has taken further action against the Non-Fungible Token (NFT) sector by charging Stoner Cats 2 (SC2) with conducting an unregistered offering of crypto asset securities. The charges are related to the sale of non-fungible tokens by Stoner Cats, which raised around $8 million from investors to fund the production of an animated web series.
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SEC charges Stoner Cats with unregistered $8M NFT securities sale. SEC’s Legal Earthquake Hits NFT Market Once Again
SEC charges Stoner Cats with unregistered $8M NFT securities sale. On July 27, 2021, SC2 allegedly sold over 10,000 NFTs to investors at approximately $800 each, with the entire supply being sold out within 35 minutes. The SEC claims that SC2's marketing campaign emphasized the potential benefits of owning the NFTs, including the ability to resell them on the secondary market. SC2 also highlighted their Hollywood producer expertise, knowledge of crypto projects, and involvement of well-known actors in the web series, which led investors to anticipate profits from the potential rise in resale value. The NFTs were configured to provide a 2.5% royalty for each secondary market transaction, incentivizing individuals to buy and sell the NFTs. Purchasers allegedly engaged in over 10,000 transactions, amounting to more than $20 million. The SEC alleges that SC2 violated the Securities Act of 1933 by offering and selling these "crypto asset securities" to the public without registering the offering or qualifying for an exemption. According to Gurbir S. Grewal, Director of the SEC's Division of Enforcement, the determination of whether an investment contract qualifies as security lies in the economic reality of the offering, rather than the labels attached to it.
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.
Stoner Cats Settles Charges, Agrees To NFTs Destruction
The SEC's recent actions aim to ensure proper disclosures and protect investors in the NFT market. However, some critics argue that the SEC's language and terminology are biased and lack clarity. Adam Cochran, a crypto enthusiast and investor, expressed his concerns about the SEC's communications, stating that there is no such thing as an "unregistered offering of NFTs" since registration requirements typically apply to securities. Cochran believes that the SEC's language should accurately reflect the law to avoid fear-mongering and a chilling effect.
As a response to the charges, SC2 has agreed to a cease-and-desist order and to pay a civil penalty of $1 million. The order also establishes a Fair Fund to return funds to injured investors who purchased the NFTs. Additionally, SC2 has committed to destroying all NFTs under its possession or control and publishing notice of the order on its website and social media channels.
The SEC's lawsuit against Stoner Cats highlights the ongoing regulatory battle surrounding the NFT sector. As the industry evolves, stakeholders are calling for clearer guidelines and unbiased regulatory practices to strike a balance between investor protection and fostering innovation in the digital asset space.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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