The Securities and Exchange Commission (SEC) has initiated legal proceedings against Stoner Cats 2 LLC (SC2). They are being charged for conducting an unregistered sale of cryptocurrency asset securities presented under the guise of alleged non-fungible tokens (NFTs).

Furthermore, the venture amassed an approximate $8 million from investors. This funding was earmarked for the production of an animated online series known as Stoner Cats.

According to the SEC’s investigation, on July 27, 2021, SC2 marketed and traded over 10,000 NFTs to investors. These were valued at approximately $800 each. Remarkably, all these tokens were entirely sold out in a mere 35 minutes.

SEC’s Findings on SC2’s Stoner Cats NFT Promotion and Transactions

SEC's Findings on SC2's Stoner Cats NFT Promotion and Transactions

The SEC’s directive states that SC2’s promotional campaign had a dual focus: both preceding and succeeding the dissemination of Stoner Cats NFTs to the general public. This campaign underscored various advantages of possessing these tokens. Consequently, these advantages encompassed the opportunity for holders to resell their NFTs on the secondary market.

Furthermore, the promotional campaign highlighted SC2’s prowess as Hollywood producers. Additionally, they emphasized their proficiency in cryptocurrency ventures. Moreover, they pointed out the participation of renowned actors in the online series.

As a result of these promotional endeavors, investors were induced to speculate that they might potentially realize profits from owning Stoner Cats NFTs. This was because a triumphant online series could potentially elevate the resale value of these tokens on the secondary market.

Moreover, the SEC’s directive exposed that SC2 had configured the Stoner Cats NFTs to bestow upon the company a 2.5 percent royalty for each transaction conducted on the secondary market. This meant that, with each resale, a portion was funneled back to SC2.

Additionally, SC2 actively encouraged individuals to procure and trade these NFTs. This proactive promotion resulted in purchasers expending in excess of $20 million across at least 10,000 transactions. This surge in activity generated significant revenue for SC2.

Given these revelations, the SEC reached a decisive conclusion. They found that SC2 had transgressed the Securities Act of 1933. This transgression was in proposing and vending cryptocurrency asset securities to the public. Moreover, this was done through an unregistered offering. This offering did not meet the criteria for an exemption as outlined in the Act.

SEC Directors’ Emphasis on Securities Regulations and SC2’s Compliance Resolution

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized the critical importance of federal securities statutes. According to him, the essence of the offering, its economic implications, and the commitments extended to investors are pivotal factors. These remain significant regardless of the nomenclature or fundamental assets in play.

He further underscored a key point. Stoner Cats positioned itself as possessing expertise in cryptocurrency ventures. Additionally, it implied that the prices of the NFTs could surge. This led investors to believe they could profit from trading the NFTs on the secondary market.

Carolyn Welshhans, Associate Director of the SEC’s Home Office, highlighted a crucial point. She emphasized the necessity of registering securities, which includes cryptocurrency asset securities. This registration serves a vital purpose: safeguarding investors.

By registering, companies provide investors with the requisite disclosures. These disclosures are instrumental in enabling informed investment decisions. This ensures a level of transparency and protection for those participating in the market.

Without admitting guilt or dissenting from the SEC’s findings, SC2 consented to a cease-and-desist order and a monetary penalty of $1 million. A Fair Fund will be established to reimburse affected investors for their expenditures on the NFTs.

Moreover, SC2 has pledged to obliterate all NFTs under its possession or control and publicize notification of the order on its website and social media platforms.

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