Dear Bankless Nation,
Gary Gensler went after the celebrity-packed Stoner Cats NFT project this week, but the ramifications go far beyond creating more headaches for Ashton Kutcher and Mila Kunis.
Today we ask one question: Is Gary Gensler coming for your NFT startup?
-Bankless team
The SEC is going after NFTs.
This week, the SEC charged the creators of Stoner Cats for conducting an unregistered securities offering, leaving plenty of NFT fans awfully concerned about the regulatory fate of many other PFP projects.
Stoner Cats is an NFT-based cartoon series created by Orchard Farm Productions, the production studio of actress Mila Kunis, who also lent her voice to one of the characters.
The project launched in 2021 in tandem with the Stoner Cats collection. The cartoon series also featured celebrities like Ashton Kutcher, Jane Fonda, Seth McFarlane, Chris Rock, and even Ethereum creator Vitalik Buterin. The NFTs served as entrance tickets for viewers to access the web series episodes.
The SEC announcement detailed that the Stoner Cats team had agreed to honor a cease-and-desist order, pay a $1 million USD fine, and establish a “Fair Fund” so investors in their NFTs can recoup their money.
More concerning than the fine were the justifications for the charges from the SEC and descriptions of the "sins" committed by the Stoner Cats team.
Per its announcement:
“The order finds that both before and after Stoner Cats NFTs were sold to the public, [the creators’] marketing campaign highlighted specific benefits of owning them, including the option for owners to resell their NFTs on the secondary market. In addition, the order finds that, as part of the marketing campaign, the team emphasized its expertise as Hollywood producers, its knowledge of crypto projects, and 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.”
This enforcement action is notably only the SEC’s second against an NFT project. The first was last month, when the Commission charged Tom Bilyeu’s media company Impact Theory with conducting an unregistered securities offering via its Founder’s Key NFTs.
Why this case matters
The SEC is increasingly turning its attention to the NFT space, and unfortunately it has a hammer and is only seeing nails right now.
Indeed, if the Impact Theory case wasn’t bad enough, this new Stoner Cats enforcement demonstrates the SEC likely views most roadmap-centric projects from the 2021 bull run as securities. That’s basically every PFP project!
Another troubling element here is that we now have more evidence that the SEC sees royalties as contributing to whether or not an NFT is a security.
The Commission argued that royalties incentivized Stoner Cats to boost secondary market activity. However, there wasn't any concrete evidence presented that showed Stoner Cats intentionally creating market volatility to increase their royalties. The mere existence of such royalties was portrayed as problematic, which could have broader implications for many NFT projects.
Additionally, the SEC's emphasis on the resale of Stoner Cats NFTs in the secondary market before the release of episodes is a curious point of contention. This focus implies that any collectible with a strong resale market — from baseball cards to rare wines — could be viewed as a security.
Needless to say, this interpretation is a significant departure from traditional securities law and appears to be an attempt by the SEC to expand its jurisdiction.
Dissents against the SEC
“The Stoner Cats NFT purchasers received what they paid for — a still image of a character from the series, access to all six episodes of the Stoner Cat series, and the excitement of being part of a popular phenomenon. The Commission’s application of the securities laws here makes little sense and discourages content creators from exploring ways to harness social networks to create and distribute content. More generally, it contributes to the legal ambiguity facing artists, writers, musicians, filmmakers, and others seeking to build a loyal, engaged following.”
“The only certain outcome from this enforcement action is that NFT projects will have to do extensive and expensive legal analyses and pre-publication reviews to try to avoid Stoner Cats’ fate in marketing these collectibles, and because the SEC overreached here they’ll never be able to get absolute certainty from their lawyers that they’re on the right side of the line. This will stifle creative business and prevent creators from using crypto collectibles instead of more traditional types of merch.”
“The problem comes in paragraph 4 which says, in part: ‘In addition, at least 20% of the Stoner Cats NFTs purchased in the offering were resold in the secondary market before the first episode of the Stoner Cats series aired, two days after the offering, and the majority of the NFTs purchased in the offering were resold in the secondary market before the release of the second episode on November 15, 2021.’ That is completely irrelevant to a securities analysis and the natural extension of that is any collectible that has a robust resale market … is potentially sold as a security. That is not the law, but it seems that the SEC is using essentially dicta in order to creep its jurisdiction.”
Zooming out
The SEC's recent actions against NFT projects like Stoner Cats raise more than a few pressing questions about the future of the NFT space and its intersection with securities law.
As the lines blur between collectibles and potential securities, at least in the eyes of the SEC, many in the crypto community are left wondering: "Is the Commission coming for my NFT startup?"
While the answer remains uncertain and the power-grabbing angle here makes for a sad state of affairs, what's clear is that the regulatory landscape is evolving – not for the better in this case – and NFT projects must tread carefully to navigate the shifting sands that are afoot.
Action steps:
- 🚨 Read the SEC Stoner Cats Press Release
- 👏 Read the Dissent of Commissioners Peirce and Uyeda