The non-fungible tokens (NFTs) Stoner Cats 2 LLC (SC2) used to solicit nearly $8 million from investors to fund an animated web series were part of an unregistered offering of crypto asset securities, according to the Securities and Exchange Commission (SEC).

SEC Slaps Stoner Cats 2 With Charges: NFTs Deemed Unregistered Securities in $8M Offering

The SEC order published on Wednesday states that on July 27, 2021, SC2 offered and sold more than 10,000 NFTs for about $800 each, selling out in about 35 minutes. According to the SEC, the marketing effort touted advantages, including the NFTs’ capacity to be sold again on the secondary market.

In addition, SC2 highlighted the experience of its Hollywood creators, their familiarity with cryptocurrencies, and the involvement of well-known actors, encouraging investors to anticipate gains from increased resale value if the web series is a success. For the animated series created by Orchard Farm Productions, the project was created by American actress and producer Mila Kunis.

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According to the SEC, SC2 set up the NFTs to pay a 2.5% royalty on secondary sales and promote trading. Following that, investors spent over $20 million on at least 10,000 trades on the secondary market. The SEC’s court judgment stated that SC2 broke securities regulations by making the crypto assets available to the general public without first registering the offering.

According to Gurbir Grewal, director of the SEC enforcement division, “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.” Grewal also said:

According to the SEC’s order, Stoner Cats promoted its expertise in cryptocurrency projects, boasted that the price of their NFTs may rise, and took other actions that gave investors the impression that they would make money if they sold the NFTs on the secondary market.

According to Carolyn Welshhans, an SEC associate director of enforcement, the unregistered NFT offering purportedly deprives investors of crucial details for making educated judgments. “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,” she claimed.

A cease-and-desist order, a $1 million fine, the destruction of its NFTs, and the publication of notice of the accusations were all accepted by SC2. The fine would be applied to investors who allegedly suffered losses as a result of the unregistered offering. However, SC2 did not accept or reject the SEC’s conclusions.

The SC2 case comes after the SEC took action against the NFT initiative that Los Angeles-based media business Impact Theory had started. The company reached a settlement with the SEC and agreed to remove royalties and destroy any NFTs it owned.

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