Stoner Cats 2 LLC Settles with SEC for $1 Million
Stoner Cats 2 LLC, the company behind the animated series, has agreed to pay a $1 million settlement to the U.S. Securities and Exchange Commission (SEC). The SEC accused the company of illegally raising $8 million through the sale of over 10,000 NFTs in just 35 minutes on July 27, 2021. The settlement does not require Stoner Cats 2 LLC to admit or deny any wrongdoing.
Stuart Alderoty, the Chief Legal Officer of Ripple Labs Inc., expressed doubt about the effectiveness of the SEC’s actions. While Alderoty did not comment on the specific case of Stoner Cats, he stated that settlements made to avoid admitting or denying anything are not legally binding. He suggested that when taken to court, the SEC often loses.
What the SEC Has to Say?
Gurbir Grewal, the Director of the Division of Enforcement at the SEC, explained that the determination of an asset as a “security” depends on its economic substance rather than its external attributes or labeling. The message from the SEC is clear: if something looks and acts like a security, it will be treated as such, regardless of its appearance.
Former Federal Prosecutor James K. Filan and Australian Lawyer and Digital Asset enthusiast Bill Morgan criticized the SEC’s approach. They argue that the regulatory body is burdensome rather than protective, especially in a market it doesn’t fully understand. Filan also commended Ripple for fighting and securing a “not security” status for its token XRP.
What Makes NFTs Securities?
Crypto & Finreg lawyer Mike Selig highlighted several factors contributing to the SEC’s viewpoint:
- Rights Reservation: Stoner Cats NFTs reserved all commercial rights to the underlying intellectual property, which is a key factor in determining them as securities.
- Marketing Strategy: The issuer promoted the NFTs as an investment tied to the success of an associated animated series, similar to the ICO boom in 2017.
- Royalties: The issuer received a 2.5% royalty on secondary sales, which incentivized boosting secondary trading, according to the SEC.
The Stoner Cats 2 LLC case has sparked debate about whether NFTs are becoming the ICOs of this new crypto era. While Ripple’s resistance against SEC regulations resulted in one token being classified as a non-security, it appears that the SEC is continuing to tighten its regulatory control over crypto-assets.
Hot Take: The SEC’s Ongoing Battle with Crypto
The settlement between Stoner Cats 2 LLC and the SEC highlights the regulatory body’s continued efforts to crack down on illegal activities in the crypto space. However, skeptics like Stuart Alderoty question the effectiveness of such settlements without any admission or denial of wrongdoing. On the other hand, legal experts argue that the SEC’s approach may be overly burdensome and not fully protective. The debate over whether NFTs should be classified as securities continues, with the SEC focusing on factors such as rights reservation, marketing strategy, and royalties. Regardless, it seems that the SEC is determined to strengthen its regulatory grip on crypto-assets.
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