We recently reported on the first NFT enforcement action brought by the U.S. Securities and Exchange Commission.  On September 13, 2023, the Commission brought its second, against  Stoner Cats 2 LLC (SC2), the entity responsible for the cartoon series Stoner Cats.  The animated Web3 series featured the voices of Ashton Kutcher, Mila Kunis, Chris Rock, Jane Fonda, Seth MacFarlane and others.  The series is about the adventures of cats who learned to talk after inhaling medical marijuana. The NFT offering gave buyers access to watch the series, their own “Stoned Cat” avatar and promised the creation of future animated projects.

According to the SEC, SC2 offered and sold to investors more than 10,000 NFTs for approximately $800 each, selling out in 35 minutes. As occurred in the first NFT case, the Order sought to establish the factors in the well-known Howey test and thus demonstrate that the NFTs were sold as investment contracts, and therefore securities.

The SEC’s Order 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. In addition, as part of the marketing campaign, the SC2 team 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.  The Order also found that SC2 configured the Stoner Cats NFTs to provide SC2 a 2.5 percent royalty for each secondary market transaction in the NFTs and it encouraged individuals to buy and sell the NFTs, leading purchasers to spend more than $20 million in at least 10,000 transactions. According to the SEC, SC2 violated the Securities Act of 1933 by offering and selling these crypto asset securities to the public in an unregistered offering that was not exempt from registration.

Without admitting or denying the SEC’s findings, SC2 agreed to a cease-and-desist order and to pay a civil penalty of $1 million. The order established a Fair Fund to return monies that injured investors paid to purchase the NFTs. SC2 also agreed to destroy all NFTs in its possession or control and publish notice of the order on its website and social media channels.

As was also the case in the SEC’s first NFT enforcement action, Republican Commissioners  Pierce and Uyeda dissented, stating in part as follows:

We respectfully dissent from the Commission’s second non-fungible token (NFT) settlement, as we did from the first.  The application of the Howey investment contract analysis in this matter lacks any meaningful limiting principle.  It carries implications for creators of all kinds.  Were we to apply the securities laws to physical collectibles in the same way we apply them to NFTs, artists’ creativity would wither in the shadow of legal ambiguity. 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.

Whether an artist is selling numbered versions of physical prints for fans to display on their walls or NFTs for fans to display on social media, she deserves clear guidance about whether and how the securities laws apply.  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. . . .

NFT creators, along with other artists, do not get a free pass from the securities laws.  In some instances, sales of NFTs may implicate our securities laws.  In applying the securities laws in this space, however, the Commission must take care to preserve the ability of artists to sell their work, build a fan base, and involve that fan base in future creative endeavors.  That is what was happening in the 1970s with Star Wars, and that is what was happening here with Stoner Cats. The Stoner Cats NFT purchasers received 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.  The Commission’s application of the securities laws here makes little sense and discourages content creators from exploring ways to harness social networks to create and distribute content.  More generally, it contributes to the legal ambiguity facing artists, writers, musicians, filmmakers, and others seeking to build a loyal, engaged following.


David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. David has been included in Chambers for his expertise in international arbitration. He is the editor of the firm's blockchain blog.