The U.S. Securities and Exchange Commission (SEC) targeted a star-studded NFT project, "Stoner Cats," featuring the voices of Ashton Kutcher, Mila Kunis, Chris Rock, Jane Fonda, Seth MacFarlane, and other Hollywood celebrities. On Wednesday, September 13, the federal agency charged the creators of the animated series for conducting an unregistered offering of NFTs. Stoner Cats 2 LLC, the company behind the project, has agreed to a $1 million civil penalty and will establish a fund to reimburse NFT buyers.

This case marks a significant step in the SEC's ongoing efforts to regulate the burgeoning NFT market. While NFTs have often been viewed as collectibles rather than securities, the SEC's action suggests that the regulatory landscape could be shifting. Projects that promise future profits and are heavily promoted could come under scrutiny, even if they involve non-traditional assets like NFTs.

According to the Hollywood Reporter, Gurbir S. Grewal, director of the SEC’s Division of Enforcement, in a statement, said, “Regardless of whether your offering involves beavers, chinchillas or animal-based NFTs, under the federal securities laws, it’s the economic reality of the offering — not the labels you put on it or the underlying objects — that guides the determination of what’s an investment contract and therefore a security… Here, the SEC’s order finds that Stoner Cats marketed its knowledge of crypto projects, touted that the price of their NFTs could increase and took other steps that led investors to believe they would profit from selling the NFTs in the secondary market. It’s therefore hardly surprising, as the order finds, that Stoner Cats sold its entire supply of NFTs in just 35 minutes, generating proceeds of over $8 million, most of which were then resold — not held as collectibles — in the secondary market within months.”

By marketing statements touting that the price of the NFT could increase in value to those who purchased the NFTs, the SEC has classified these NFTs as investment contracts, thereby categorizing them as securities. As such, they are required to be registered prior to public offering. The SEC employs the "Howey test" to determine if an asset qualifies as an investment contract. This test stipulates that an investment of money must be made in a collective venture, where the investor anticipates a return on investment, and that return is solely reliant on the endeavors of third parties.

The SEC's move could serve as a cautionary tale for celebrities considering NFT ventures. The involvement of high-profile individuals like Kutcher and Kunis in promoting the project likely drew the SEC's attention. Celebrities may now think twice before lending their name and reputation to such projects, fearing regulatory repercussions.

The SEC's action also highlights the need for more transparent guidelines to protect consumers in the NFT space. The Stoner Cats project raised over $8 million by selling NFTs that granted access to the animated series and other perks. However, the SEC found that the funds were used to pay the cast and production team, raising questions about the true nature of the offering.

The SEC's action against the "Stoner Cats" NFT project serves as a wake-up call for both the crypto industry and celebrities. It underscores the importance of regulatory compliance and consumer protection, even in new and evolving markets like NFTs. As the SEC's Director of Enforcement, Gurbir S. Grewal, stated, the economic reality of an offering determines its classification under federal securities laws, regardless of how it is labeled.