April 19, 2024
SEC's Action against 'Stoner Cats' NFT Shakes NFT-Backed Media Industry
NFT

SEC’s Action against ‘Stoner Cats’ NFT Shakes NFT-Backed Media Industry

The team behind “Stoner Cats,” an NFT-backed web series from Mila Kunis’ production company that included the vocal talents of Hollywood A-listers such as Kunis, Ashton Kutcher, Chris Rock, and Jane Fonda, was the target of the SEC’s second-ever enforcement action against NFT project creators earlier this month.

Given the cited claims, the SEC’s first case involving NFTs—against a media company that promised “massive” returns on its membership passes once it became “the next Disney”—raised only a few eyebrows among industry experts. However, the response to the “Stoner Cats” announcement has been quite different.

The case seems to have sent shockwaves across the growing industry of film and television productions looking to use NFTs to raise money directly from devoted fan bases rather than relying on the incredibly centralized studio structure for finance and distribution.

Under the condition of anonymity, the creator of an anticipated independent television series supported by NFTs told a news outlet, “It’s pretty awful and has me super worried.” They claim that this creator’s project has been checked for any possible legal difficulties, but in light of the “Stoner Cats” incident, they are worried that by attracting attention to it, it may come under regulatory review.

The well-established obscurity of the SEC’s approach to cryptocurrencies and NFTs is a major factor in this anxiety. The federal agency has not released a single policy or regulation outlining which NFT apps it would deem acceptable; rather, Gary Gensler, the chair of the commission, has frequently asserted that the agency’s legal actions speak for themselves. Regulation by enforcement.

Two of the SEC’s commissioners—Hester Peirce and Mark Uyeda—issued a severely worded critique of the decision following the public disclosure of the agency’s action against the “Stoner Cats,” arguing that it would stifle innovation and cause confusion among producers.

“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,” the commissioners stated. “More generally, it contributes to the legal ambiguity facing artists, writers, musicians, filmmakers, and others seeking to build a loyal, engaged following.”

Many indie television and film producers expressed a similar view and now fear that their NFT-supported productions may be the next to be axed.

“Trying to comply with SEC rules and regulations is like trying to hit a moving target,” Justin Winters, co-founder and CEO of Web3 film studio Verified Labs, commented. “It’s completely unfair for them to start issuing fines until they have specific laws in place to which we can all reference and adhere.”

Along with several other partners, Winters operates Verified, including co-founder and “Napoleon Dynamite” actor Jon Heder. By selling NFTs to devoted fans that grant access to content and special benefits, their team has collectively supported many television projects. Winters does not believe that “Stoner Cats” or Verified’s projects should be penalized for their fundraising efforts or community outreach efforts. For this purpose, he plans to move Verified’s pipeline of projects forward at top speed.

“I know the team behind ‘Stoner Cats,’ and they delivered on their promise,” Winters stated. “Our studio has four Web3-native animated series that are following the ‘Stoner Cats’ model—it allows you to finance, develop, produce, and distribute an animated series independently of the studio system.”

“Claiming future prices as a product feature is something we all must avoid,” the CEO of a Web3 media brand stated to a news outlet on the condition of anonymity.

Others in the business, however, believe the lawsuit against “Stoner Cats” was fair because the project made assertions that the NFTs would also become more “successful” the more popular the show was.

But are media enterprises sponsored by NFT truly unafraid if they don’t guarantee future gains for holders?

A section of the SEC’s cease-and-desist letter against “Stoner Cats” that was very similar to language from the organization’s first action against an NFT offering last month fascinated Drew Hinkes, an attorney and adjunct professor at NYU who focuses on digital assets.

In both situations, the SEC warned that an NFT project was more likely to be an illegally unregistered securities scam if it ever levied a creator royalty—a modest sum paid back to the project each time one of the assets is sold. A royalty charge is usually associated with NFT projects and generally ranges from 2.5% to 10% of the secondary sale price.

According to Hinkes, such an apparent stance might have significant ramifications for the NFT sector—not just for creators who favour the royalties as a way to help artists (despite dwindling enforcement), but also for the NFT marketplaces that collect and apply those payments.

“You could read this as suggesting that marketplaces that facilitate the trading of NFTs that pay royalties on secondary market transactions to issuers, which under the SEC’s theories may be securities, may have some risk of being considered broker-dealers or securities exchanges by the SEC,” Hinkes explained. “That’s the implication of the position that the SEC is taking here.”

According to this reasoning, the SEC would not allow NFT marketplaces to operate without the same kind of registrations that stock exchanges like the New York Stock Exchange and the Nasdaq hold. Such registrations are issued relatively infrequently.

It may take some time before it is apparent if the SEC has such a broad regulatory appetite due to the agency’s present, secretive approach to crypto regulation. However, the doubt and apprehension caused by its action against “Stoner Cats” is probably certain to spread outside the small community of NFT-supported media initiatives, many of which are referred to as “Film3” ventures.

Hinkes believes that the SEC’s current actions on NFTs are similar to how it handled cryptocurrency. The government initially targeted cryptocurrency businesses that blatantly flouted securities regulations, but it gradually broadened its purview until it had sued almost all significant crypto exchanges with a presence in America.

“This very much echoes the pattern that the SEC pursued with fungible tokens,” he concluded.

Image: Pexels

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