What does the U.S. SEC’s focus on NFT mean to NFT?

Author: William M. Peaster, Bankless; Translation: Golden Finance xiaozou

This week, the U.S. Securities and Exchange Commission (SEC) charged the creators of Stoner Cats with issuing unregistered securities, leaving NFT fans worried: What regulatory fate will so many other PFP projects face?

Stoner Cats is an NFT-based animated short series produced by Orchard Farm Productions. It was created and launched by actress Mila Kunis, who is also the voice actor of a character in the short film.

The project launches in 2021 with the Stoner Cats collection. The series of animated short films also features celebrities such as Ashton Kutcher, Jane Fonda, Seth McFarlane, Chris Rock, and even Ethereum creator Vitalik Buterin. NFT is the audience’s ticket to watch the series of short plays.

The SEC’s announcement details that the Stoner Cats team has agreed to comply with the cease-and-desist order, pay a $1 million fine, and establish an “equitable fund” where their NFT investors can recover their funds.

Even more concerning than the fine is the SEC's rationale for the charges and its description of the "crimes" the Stoner Cats team committed.

Excerpts from the SEC announcement are as follows:

“The court order finds that before and after the Stoner Cats NFTs were sold to the public, [the creators’] marketing campaigns promoted specific benefits to owning these NFTs, including that owners could resell their NFTs on the secondary market. Additionally, The order also found that as part of the marketing campaign, the team promoted its expertise as a Hollywood producer, knowledge of crypto projects, and high-profile actors involved in the web series, which led investors to expect profit returns because The success of the web series may increase the value of the Stoner Cats NFT when resold on the secondary market.”

It is worth noting that this is the SEC’s second accusation against an NFT project. The first was last month's charges against Tom Bilyeu's media company Impact Theory for conducting an unregistered securities offering through Founder's Key NFTs.

1**. Why is this case important? **

The SEC’s attention is increasingly turning to the NFT field. Unfortunately, it wields a big hammer and only sees a nail.

In fact, if the Impact Theory case wasn't bad enough, the Stoner Cats charges suggest that the SEC may consider most roadmap-focused projects in the 2021 bull run to be securities. **This basically covers all PFP programs! **

Another troubling factor is that there is now more evidence that the SEC believes royalties influence the definition of whether NFTs are securities.

The SEC believes that royalties incentivized Stoner Cats to promote secondary market activity. However, there is no conclusive evidence that the Stoner Cats deliberately create market volatility to increase their royalty income. The very existence of such royalties is seen as problematic, which could have wider implications for numerous NFT projects.

Additionally, the SEC’s emphasis on reselling Stoner Cats NFTs on the secondary market prior to the release of the episode is an odd one. This focus means that any collectible with a strong resale market—whether baseball cards or rare wine—can be considered a security.

Needless to say, this interpretation deviates significantly from traditional securities laws and appears to be an attempt by the SEC to expand its jurisdiction.

2**, Objection to SEC******

• SEC Commissioners Hester Peirce** and Mark Uyeda**** on growing legal ambiguity:**

"Stoner Cats buyers get 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 sense. The SEC’s application of securities laws here is of little significance and hinders content creators from exploring ways to use social networks to create and distribute content. On a broader scale, this will lead to artists, writers, musicians, film production and others seeking to build loyalty and engagement face greater legal ambiguity.”

• Attorney and Professor Preston Byrne** on the daunting challenges facing creators: **

“The only certain outcome from this charge is that NFT projects will have to undergo extensive and expensive legal analysis and pre-publication review to avoid the fate that Stoner Cats faced when marketing their collections, and due to the SEC’s overreach in this area, They’ll never get absolute certainty from their lawyers that they’re on the right side.” This would stifle creative businesses, preventing creators from using crypto collections instead of more traditional merchandise. "

• exlawyer.eth** on SEC**** jurisdictional expansion: **

"The problem is in paragraph 4, which reads, in part: 'Furthermore, at least 20% of the Stoner Cats NFTs purchased in the release will be on the secondary level before the first episode of the Stoner Cats series airs (two days after release). market, and most of the NFTs purchased in the issuance were resold on the secondary market before the second episode aired on November 15, 2021.' This has absolutely nothing to do with securities analysis, and the result is, Any collectible that has a strong resale market...could potentially be sold as a security. It's not a legal requirement, but it looks like the SEC is essentially calling the shots to expand its jurisdiction."

3**, conclusion**

The SEC’s recent actions against NFT projects such as Stoner Cats have raised some pressing questions about the future development of the NFT space and its intersection with securities laws.

As the lines between collectibles and potential securities blur, at least in the eyes of the SEC, many in the crypto community are wondering: “Will the SEC target my NFT startup?”

While the answer is uncertain and the associated power grab has created a pathetic state of affairs, one thing is clear, the regulatory landscape is evolving — and not in the current case for the better — and NFT projects must Tread carefully through the rolling quicksand.