Stoner Cats NFT Saga Unveils SEC's Regulatory Grip on Celebrity Crypto Ventures

By  Noah Washington October 2, 2023

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  • Mila Kunis and Ashton Kutcher's NFT-based web series, "Stoner Cats," was charged by the SEC for conducting an unregistered offering of crypto asset securities
  • The SEC's settlement and fine for the Stoner Cats project signaled that NFTs fall under its domain and NFTs used to finance a project are considered unregistered securities
  • The SEC's action against Stoner Cats may have broad consequences for the NFT industry, as it is "drawing a picture where all NFTs are within their jurisdiction"

Mila Kunis and Ashton Kutcher, the popular celebrity couple, have faced legal issues over their NFT-based web series "Stoner Cats." The U.S. Securities and Exchange Commission (SEC) investigated whether the way "Stoner Cats" was funded through NFT sales violates securities laws.

$1 Million Fine

The creator of the popular Stoner Cats animated web series, Stoner Cats 2 LLC, will pay a $1 million civil fine to settle U.S. Securities and Exchange Commission charges that it conducted an unregistered offering of crypto asset securities by selling non-fungible tokens (NFTs). Stoner Cats did not admit or deny wrongdoing in the settlement, which alleges it illegally raised $8.2 million in July 2021 by selling 10,320 NFTs for about $800 each, which sold out in 35 minutes.

It also agreed to destroy all NFTs in its possession. This is the SEC's second crackdown on NFTs as it targets firms involved in digital assets, saying they represent securities like stocks or bonds that need SEC oversight. The NFTs provided exclusive access to watch Stoner Cats online and investors were told the NFTs' success depended on the show's success. Two Republican SEC commissioners opposed the action, saying the regulator should provide clear NFT guidelines for creators instead.

NFT-Backed Animated Series

The Adult Swim-esque animated series "Stoner Cats" leveraged NFTs in a unique way. By selling 10,000 NFTs at around $800 each, the creators gave buyers exclusive access to watch the episodes featuring A-list voice talent like Jane Fonda and Chris Rock.

Stoner Cats was co-created by former Pixar veteran Ash Brannon. Source: Cartoon Brew

The NFTs also entitled owners to 2.5% royalties on secondary sales, incentivizing early purchases. This monetization strategy allowed the creators to fund the production while building a community around the show. By tying the content to NFT ownership, "Stoner Cats" demonstrated how blockchain technology can transform media distribution and fan engagement.

SEC's Accusations

The SEC filed charges alleging that the "Stoner Cats" NFTs were unregistered securities illegally sold to the public. According to the SEC, social media accounts for "Stoner Cats" promoted the NFTs' investment potential, rather than just offering digital collectibles.

For example, one tweet jokingly encouraged buying more ether when prices dropped, framing NFT ownership as a money-making opportunity.

The price of ether over the past two years. Source: CoinGecko

By touting possible profits from resales, the SEC alleges the Stoner Cats team portrayed the NFTs as speculative securities requiring proper disclosures and registration. This high-profile case grapples with still-murky issues around marketing and selling NFTs to the public.

Community Reaction

The NFT community has lamented the SEC's action as regulatory overreach that stifles innovation. However, others argue prudent oversight is needed as the space matures. Some creators worry this could limit new NFT projects, while investors debate if increased regulation provides legitimacy or hinders growth. #StandWithStonerCats trended on social media, with divisions on the appropriate regulatory response.

Celebrity endorsements can raise the profile of crypto projects but also invite intense regulatory scrutiny, especially if promises of financial gain are made. Stars must exercise caution to avoid misleading marketing or pumping token prices. However, high-profile backers may not fully understand the compliance nuances. Stronger disclosure requirements around celebrity promotions could be beneficial.

Settlement with the SEC

In an effort to resolve the SEC's allegations, "Stoner Cats" reached a settlement that includes several key provisions: the settlement imposed a substantial $1 million fine on the project, signaling the seriousness of the SEC's concerns.

To rectify potential financial harm to NFT purchasers, a Fair Fund will be established, ensuring compensation for those who may have suffered losses; Stoner Cats is obligated to destroy all NFTs within its possession, effectively removing them from circulation and mitigating any further regulatory concerns.

The SEC's investigation into Stoner Cats may set a precedent that certain NFTs are considered securities. This would apply if the NFTs offer financial rewards similar to traditional securities. As a result, more NFT projects could face SEC scrutiny and be forced to carefully structure their offerings to comply with securities laws. While increased regulation could hamper NFT innovation in the short term, it may ultimately lend legitimacy to the space and boost mainstream adoption if clear guidelines are established.

SEC's Crackdown on Celebrity-Endorsed Crypto Projects

The SEC has ramped up oversight of celebrity crypto endorsements in light of promotions like Stoner Cats. Kim Kardashian's $1.26 million EthereumMax settlement reveals the heightened regulatory attention paid to famous figures backing digital assets.

According to SEC Enforcement Division director Gurbir Grewal, the economic substance of an offering determines if it's an investment contract security, not superficial labels or assets involved. The SEC focuses on celebrity crypto ventures' real-world functioning over terminology used.

The SEC's recent lawsuit against the creators of the Stoner Cats NFT collection has drawn attention to the unclear regulatory environment surrounding NFTs and celebrity cryptocurrency ventures. The outcome of this case could have significant implications for the future of the NFT market and celebrity crypto projects, underscoring the need for additional regulatory guidance in this fast-evolving corner of the crypto industry.