The SEC has decided to double down on enforcement against unregistered NFT offerings. While the Stoner Cats NFTs were classified as unregistered securities, the same decision was taken for Impact Theory.
SEC sanctions will increase
The U.S. Securities and Exchange Commission (SEC) regarding an unregistered offering of cryptocurrency asset securities, NFT Impact Theory and Stoner Cats 2 announced two enforcement actions against the platforms. In both enforcement actions, the SEC determined that NFTs were securities under the Howey test.
On August 28, 2023, the agency accused Los Angeles-based media and entertainment company Impact Theory of engaging in an unregistered NFT offering in violation of federal securities laws. According to the SEC, Impact Theory marketed these NFTs as investments, meaning investors would profit if it was successful in its endeavors. The SEC concluded that these NFTs were investment contracts and therefore securities under the Howey test. Impact Theory and the Securities and Exchange Commission signed a memorandum of understanding to resolve the claims in exchange for payment of approximately $6 million in damages, interest and civil penalties.
On September 13, 2023, the SEC doubled down on its enforcement in the NFT space, accusing SC2 of running an unregistered NFT offering that raised nearly $8 million from investors to finance an animated web series called Stoner Cats. According to the SEC, on July 27, 2021, SC2 offered and sold more than 10,000 NFTs for about $800 each, selling them in just 35 minutes, generating about $8.2 million in revenue.
Clear regulation is necessary
The Commission found that SC2 offered and sold Stoner Cats NFTs as investment contracts; It found that under the Howey test, Stoner Cats was required to register the offering and sale of its NFTs with the SEC. Gurbir S., Director of the SEC’s Enforcement Division. Grewal emphasized that “it is the economic reality of the offering that guides the determination that something is an investment contract and therefore a security, not the labels you put on it or the underlying objects.” In case, SC2’s marketing practices and promises of potential profits are not registered with the SEC Stoner Cats NFTs SecurityThis led to classification as ‘S’.
In both cases, SEC Commissioners Hester M. Pierce and Mark T. Ueda disagreed, calling for more clarity for artists and other creators exploring the NFT sphere. On the other hand, this apparent disagreement among Commission members underlined the need for clear rules rather than regulation through implementation.