Entertainment Company Fined for Unregistered Sale of NFTs

An entertainment company settled charges with the SEC for offering and selling non-fungible tokens ("NFTs") without registering with the SEC.

According to the Order, the entertainment company produced an animated web series called "Stoner Cats" and offered and sold NFTs that were based on the characters in the Stoner Cats series. The SEC said that the company told investors that the proceeds of the sale of the NFTs would be used to fund production of the series and to buy them because the NFTs would rise in value based on the likely popularity of the Stoner Cats series.

The SEC found that the company effectively offered unregistered investment contracts. Consequently, the SEC determined that the company was required to register or receive an exemption from registration, but failed to do either. The SEC determined that the company violated Securities Act Section 5(a) and (c) ("Prohibitions relating to interstate commerce and the mails").

To settle the charges, the company agreed to (i) cease and desist from further regulatory violations, (ii) comply with the undertakings set forth in the Order and (iii) pay a civil money penalty of $1,000,000.

Statement

In a dissenting statement, SEC Commissioners Hester M. Peirce and Mark T. Uyeda argued that the SEC's application of securities laws "makes little sense and discourages content creators from exploring ways to harness social networks to create and distribute content." They criticized the decision for "arbitrarily bringing enforcement actions against NFT projects" and said that clearer guidelines should be provided for artists seeking to fund their creative efforts.

In an address before the IFC-Milken Institute's Capital Markets Scholars Program (that did not expressly reference Stoner Cats), Ms. Peirce emphasized the importance of the SEC practicing "regulatory forbearance," which includes waiting to bring enforcement actions until the SEC has "set forth the rules clearly" and allowing enough time for compliance. She said that a "commitment to the rule of law precludes arbitrary enforcement of the law."