SEC’s Regulatory Focus Shifts to NFTs: The SEC’s crackdown on the cryptocurrency sector now extends to NFT collections like ‘Stoner Cats.’ Explore how this regulatory shift impacts the NFT world, and why this adorable yet controversial digital project has come under financial scrutiny.
In the world of cryptocurrency, regulatory waves continue to ripple, and the SEC (Securities and Exchange Commission) is at the forefront. This year, the SEC has been on a campaign against the crypto sector, with its primary focus on classifying most cryptocurrencies as securities or financial assets, bringing them under its regulatory umbrella. Notably, major exchanges like Binance and Coinbase have recently faced regulatory challenges from the SEC. However, SEC’s Regulatory Focus Shifts to NFTs Gary Gensler’s SEC has set its sights on a new target: NFT collections.
Stoner Cats in Legal Trouble?
For NFT enthusiasts, it’s time to brace yourselves! When it comes to art, there’s a wide array of styles and colors to explore. Yet, with NFTs, there’s also a significant financial aspect, fueled by the ease of blockchain-based transactions. This financial dimension has recently drawn the attention of the US regulatory watchdog, the SEC. And their latest target? Cute, somewhat “stoned,” but entirely digital cats.
Enter the “Stoner Cats” project, an NFT endeavor that emerged in July 2021, right amid a previous crypto bull run. It witnessed the sale of 13,420 NFTs at 0.35 ETH each, equivalent to $785 at the ETH price at that time, all within a mere 35 minutes. It was a different atmosphere, clearly driven by the frenzy of surging crypto prices. But what was the allure of these peculiar NFTs?
The concept was rather unique: SEC’s Regulatory Focus Shifts to NFTs owning one of these NFTs was the sole ticket to watching an animated series featuring the voices of international stars like Mila Kunis, Ashton Kutcher, Seth MacFarlane, Chris Rock, and Jane Fonda. To add to the intrigue, one of the characters was portrayed by none other than Vitalik Buterin himself, a prominent figure in the crypto world.
SEC’s Regulatory Focus Shifts to NFTs These A-list celebrities didn’t hesitate to promote the project, triggering a frenzy among the masses. As expected, this high-profile endorsement led to an exceptionally rapid sale of NFTs, despite their relatively high price tag. However, two years later, the SEC has decided to dig deeper into this story, and they aren’t pleased with what they’ve uncovered. Let’s delve into the details:
“Stoner Cats wanted all the benefits inherent to offering security to the public but ignored the legal responsibilities that come with it.”
SEC’s Regulatory Focus Shifts to NFTs – Carolyn Welshhans, Associate Director at the SEC
According to the SEC, the NFTs from the “Stoner Cats” project are classified as securities.
In a report unveiled on September 13, 2023, the SEC accused the individuals behind the “Stoner Cats” project of selling financial securities without obtaining the necessary authorization.
The “Stoner Cats” NFTs are classified as securities by the SEC – Source: X
Through the sale of NFTs, the “Stoner Cats” project managed to raise a staggering $8 million, which was essential for financing their animated series. However, their marketing campaign and the intricacies associated with NFTs, as highlighted by the project, have raised eyebrows at the regulatory agency.
SEC’s Regulatory Focus Shifts to NFTs While NFT holders had the option to trade their digital collectibles, they were also actively encouraged to do so. This encouragement was financially incentivized, as NFT holders received a 2.5% royalty on each resale, resulting in over 10,000 secondary market transactions totaling $20 million.
Furthermore, the project’s credentials as Hollywood producers were prominently featured during the promotional phase. Orchard Farm Production, Mila Kunis’s company, was at the helm of the animated series.
Could “Stoner Cats” Serve as a Warning for All NFT Projects?
The SEC argues that the project’s emphasis on the team’s expertise inadvertently led investors to expect guaranteed profits from their NFT purchases.
“Whether your offering involves beavers, chinchillas, or NFTs of animal origin, under federal securities laws, it is the economic reality of the transaction — SEC’s Regulatory Focus Shifts to NFTs not the labels you put on it or the underlying objects — that dictates whether it is an investment contract, and thus a security.”
Gurbir Grewal, Director of the SEC’s Division of Enforcement
Without admitting or denying the SEC’s allegations, the “Stoner Cats” project has agreed to pay a $1 million fine. Additionally, the project is required to reimburse defrauded investors and destroy all of the NFTs in its possession. “Stoner Cats,” caught in the regulatory smoke, is thus concluding its journey painfully. The SEC’s Regulatory Focus Shifts to NFTs project could be the first of many to come, serving as a cautionary tale for any NFT projects planning to launch in the months ahead.