Stoner Cats 2 LLC (SC2), the company behind the “Stoner Cats” animated series, has agreed to a cease-and-desist order and a $1 million fine after the U.S. Securities and Exchange Commission (SEC) charged the company with the unregistered sale of securities, in the form of non-fungible tokens (NFTs) called “Stoner Cats NFTs.”
Stoner Cats is an adult animated series about house cats that become sentient after being exposed to their owner’s medical marijuana, which is used to alleviate early Alzheimer’s symptoms.
The series was spearheaded by Hollywood actor Mila Kunis, with six episodes released from July 2021 to December 2022. SC2, the company behind the series, of which Kunis is a backer, financed the show through the sale of 10,330 Stoner Cats NFTs, each selling for 0.35 ETH, approximately $800.
The NFTs provided holders with exclusive access to watch the show online, with Investors being told that “the more successful the show, the more successful your NFT,” according to the SEC.
The SEC order noted how the creators described the NFTs as “tickets” giving holders access to the content creators of the show as well as a view behind the curtain of an animated series; if people didn’t appreciate it, they were told they could “take that ticket and sell it.”
However, the SEC viewed the NFTs somewhat differently to “tickets.”
“Today we charged Stoner Cats 2 LLC with conducting an unregistered offering of crypto asset securities in the form of purported non-fungible tokens (NFTs) that raised approximately $8 million from investors to finance an animated web series called Stoner Cats,” announced the regulator.
Without admitting or denying the SEC’s findings, SC2 agreed to a cease-and-desist order, to destroy all NFTs in its possession, and to pay a civil penalty of $1 million. The order also established a Fair Fund to return monies that injured investors paid for the NFTs.
Non-fungible tokens – the Stoner Cat story
Mila Kunis is the de facto face of Stoner Cats and apparent driving force behind the series and its NFT. Noted in both the ‘production’ and ‘blockchain’ teams on the project’s website, Kunis stated when announcing the project that she had done a deep dive into the NFT space, and that “it brings ownership of content back to the artist and cuts out the middleman.”
Kunis is also in the voice cast, alongside Ashton Kutcher, Chris Rock, Dax Shepard, Gary Vaynerchuk, Jane Fonda, Michael Bublé, Seth MacFarlane and Vitalik Buterin.
One name that seems out of place amongst these Hollywood A-listers is Buterin. The Russian-Canadian computer programmer and co-founder of Ethereum voiced Catsington, a taxidermied, monocle-sporting cat, in the series. Buterin also appeared in a short video posted on X (formerly twitter) by Kunis and Kutcher, in which he explains Ethereum from what appears to be the kitchen of the celebrity couple’s shared home.
— ashton kutcher (@aplusk) July 21, 2021
The short video jokingly paints Kunis as not exactly an expert in all things blockchain, suggesting that Buterin is possibly the technical mind behind the NFT venture, or at least one of them. Another potential “brain” behind the project is Kutcher, who has journeyed a little deeper down the digital asset rabbit hole than Kunis.
In 2010 Kutcher co-founded venture capital firm A-Grade Investments, to invest primarily in tech startups. Five years later Kutcher, along with business partner Guy Oseary, co-founded another venture capital firm, Sound Ventures LLC, also focused on tech companies—the firm’s portfolio includes Robinhood, a stock, ETF and digital asset marketplace.
Another of Sound Ventures’ more dubious investments was failed esports betting platform Unikrn, a company founded by Karl Flores and Rahul Sood. In November 2017, the company released UnikoinGold, a token based on the Ethereum blockchain (another link to Buterin), which was later deemed an illegal unregistered securities offering by the SEC, resulting in a fine of $6.1 million and UnikoinGold being shelved.
More recently Kutcher has also dabbled in the NFT space. In 2021 he invested in NFT auction marketplace OpenSea and startup NFT Genius.
All of which means, Stoner Cats NFT was not Kutcher’s first dalliance with Ethereum-based products or NFTs, and also not his first run in with the SEC – Dude, where’s my license?
Whoever was the driving force behind Stoner Cats, according to Wednesday’s SEC order they steered the project very clearly into the regulator’s jurisdictional waters. This was, however, not a unanimous opinion at the agency.
Dissenting views at the SEC
Two of the five SEC commissioners, both Republicans, opposed the action against SC2. Commissioners Hester Peirce and Mark Uyeda published a dissenting statement, arguing that the activity could be considered fan crowdfunding, “a common phenomenon in the world of artists, creators, and entertainers.”
“Artists of all kinds have long struggled to support themselves, and NFTs offer a potentially viable way for them to monetize their talents. The fact that money is involved does not transform NFTs into securities,” said Peirce and Uyeda.
They went on to suggest that “rather than arbitrarily bringing enforcement actions against NFT projects, we ought to lay out some clear guidelines for artists and other creators who want to experiment with NFTs as a way to support their creative efforts and build their fan communities.”
The pair of commissioners also compared the Stoner Cat NFTs to Star Wars collectibles sold in the 1970s, “updated for the digital age.”
This take on the enforcement action was shared by a vocal section of social media, with one commenter under the SEC’s announcement posting a song called “this song is a security,” and inviting people to bid on the NFT, while another suggested, “I think it’s time to start calling NFT’s ‘Digital Art Tokens’ because ‘DAT’ what it is!”
Despite the backlash, and possibly expecting it, the SEC made a strong case for the Stoner Cats NFTs being securities—a case which ultimately the company chose not to challenge, electing to settle instead.
The SEC found that both before and after Stoner Cats NFTs were sold to the public, SC2’s marketing campaign highlighted specific benefits of owning them, including the option for owners to resell their NFTs on the secondary market. The SEC also stated that SC2 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.”
These facts ticks all three key boxes of the Howey test, used to determine if an investment contract exists and thus an asset is a security, namely:
- An investment of money;
- In a common enterprise
- With a reasonable expectation of profits based upon the efforts of others.
“Regardless of whether your offering involves beavers, chinchillas or animal-based NFTs, under the federal securities laws, 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,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
“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.”
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