The creators of “Stoner Cats,” a short animated show featuring Mila Kunis and Ashton Kutcher, face backlash for their venture into non-fungible tokens (NFTs).
The United States Securities and Exchange Commission (SEC) has charged Stoner Cats 2 LLC (SC2), the company behind the show, over an unregistered digital asset offering.
Mandatory Stoner Cats NFTs for Show Access
SC2 stands accused of selling NFTs linked to the “Stoner Cats” series without the requisite registration as securities. To resolve the charges, SC2 has consented to a cease-and-desist order and will pay a penalty of $1 million.
In July, SC2 sold over 10,000 NFTs at approximately $800 each. These NFTs granted holders access to episodes of “Stoner Cats,” a direct-to-NFT series portraying five medicinally-altered feline characters. Mila Kunis’ Orchard Farm Productions produced the show featuring Jane Fonda.
Given the celebrity draw of Kunis and Kutcher, the entire NFT batch sold out within 35 minutes, amassing $8 million. The SEC, however, claims that SC2 flouted securities regulations by failing to register the NFTs as investment contracts.
Read more: NFTs Explained: What Are Non-fungible Tokens and How Do They Work?
The SEC’s order suggests that SC2 emphasized the Hollywood credentials of the team during its promotional efforts. With top-tier celebrities providing voiceovers, investors expected the NFTs to appreciate in value similarly to stocks, contingent on the show’s success.
Read more: 7 Most Common NFT Scams
Moreover, the SEC pointed out that SC2 imposed a 2.5% royalty fee on secondary sales. This resale incentive enabled SC2 to tally over $20 million in transactions.
SC2 maintains that the NFTs were collectibles rather than profit-generating investments. Yet, the SEC counters that the economic substance of an offering, rather than its designation, dictates whether it qualifies as an investment contract security.
The fact that SC2 insinuated investors could sell the NFTs at a profit means they classify as securities.
SEC Targets High-Profile Crypto & NFT Projects
According to the SEC, SC2 sidestepped mandatory registration, depriving investors of crucial project details and disclosures necessary for informed decision-making. The regulator also alleges that SC2 sought the advantages of a public offering but shied away from the associated responsibilities.
This charge by the SEC seems to be a strategic move to set a precedent using high-profile projects. Last year, the regulator employed a similar tactic by fining Kim Kardashian for unlawfully promoting crypto securities.
Read more: How To Create an NFT — A Step-by-Step Guide for Beginners
The SEC’s action against “Stoner Cats” is a cautionary tale for NFT projects targeting US audiences. And while SC2 is not out of hot water yet, it underscores the importance of celebrities ensuring they remain compliant with securities laws as crypto gains traction in Hollywood.
SEC Commissioner Hester Pierce, known for her pro-crypto stance, promptly issued a statement following the announcement, joined by Commissioner Mark Uyeda, challenging the actions taken against the NFT project.
Both Commissioners contend that if the same rigorous regulations were applied to traditional physical art, it would result in significant industry setbacks:
“Were we to apply the securities laws to physical collectibles in the same way we apply them to NFTs, artists’ creativity would wither in the shadow of legal ambiguity.”
They go on to explain that the Stoner Cats NFT sale can be interpreted as a form of “fan crowdfunding,” a widespread practice in the creative world, as it provided funding for an animated series production.
Furthermore, Pierce and Uyeda assert that artists, whether in physical or digital form, should have the right to clearly understand the application of securities laws.
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