The Inanity of the SEC ‘Stoner Cat’ Action

On Wednesday, the U.S. Securities and Exchange Commission (SEC) told the creators of the NFT-powered, animated web series “Stoner Cats” it’s going to have to cough up a $1 million fine, and kill the cartoon kitties left in its possession. And today, Stoner Cat NFTs are worth 250% more than yesterday with trading volume spiking 7,256%.

What’s the matter, cat got your tongue?

It seems that, in its complaint, the SEC may have left open a few questions regarding these cartoon cats, including several about the NFTs trading on the secondary market.

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Stoner Cats 2, LLC, the organization that created the NFTs and is responsible for paying the SEC fine, will also have to help set up a reimbursement fund to pay back injured investors. This “Fair Fund,” a type of account established under the Sarbanes-Oxley Act of 2002 as a way to return profits from defrauded investors, will technically be operated by the SEC. (It’s important to note Stoner Cats 2, LLC, did not admit fault by settling.)

But it’s as yet unclear exactly how much will have to be put aside for the fund, or how the disgorged money will be distributed. Will people get back ETH or U.S. dollars? Will it be equivalent to the $800 NFT mint price or at current market prices? Will injured victims also be forced to liquidate their Cats or get to keep them as a souvenir?

Considering that Stoner Cats were changing hands at a floor price of just 0.019 ETH for months and months and months, it seems like some people see the SEC action as a way to earn a profit. And they might, now that the gods of volatility have at least temporarily blessed this illiquid market.

But does anyone expect to get back the full 0.35 ETH paid apiece on minting day?

By way of comparison, when Poloniex set up its Fair Fund as part of a settlement over failing to register as a national securities dealer, it seems to have been topped off with the $8,484,313.99 in disgorgement, $403,995.12 in prejudgment interest and $1,500,000 civil money penalty the Justin Sun-connected crypto exchange paid.

If the Stoner Cats Fair Fund is similarly structured that might mean there will only be $1 million set aside for reimbursements, given that there only seems to be a $1 million civil penalty attached to the settlement. That’s only a fraction of the 3,650 ETH – worth $8.2 million at the time, and a little above $5 million today – raised in the token sale, let alone the 344 ETH (~$787K at the time) wasted in gas fees on failed transactions during the botched launch.

Then again, as the SEC also noted most minters ended up selling their tokens on the open market rather than holding the tokens as collectibles. In fact, that was essentially the SEC’s whole argument for going after Stoner Cats 2, LLC, which was able to gin up attention for the project by talking about the Hollywood talent attached — all but saying how could something Ashton Kutcher is involved in go wrong?

But if minters made a profit selling their tokens on the secondary market – which the SEC said happened at least 10,000 times, earning Stoner Cats 2, LLC, $20 million in “royalties” – could they really be called “injured investors?” Worse, I don’t think the Fair Fund is open to token holders who bought on the open market and got stuck holding the bag, who had to watch the value of Stoner Cats erode during the bear market along with every other “profile pic” NFT.

It’s possible that Stoner Cats spiked not because of anything rational, but simply because the SEC happened to shine a floodlight on a project that the world otherwise has forgotten about. And boy to do those floodlights feel warm in the crypto winter. Crypto trading has always been about “crowd psychology,” with the most important element just getting attention. (This also explains the mechanics behind Stoner Cats, which somehow got people to pay $800 for an NFT token that unlocks six episodes of a Seth McFarlane web series.)

Stoner Cats was one of the few NFT projects to actually deliver on the promises made during the token raise, or in other words it delivered on its idea of “utility.” I don’t exactly know if that makes the NFTs worth “collecting,” as some have been saying, but the whole idea was to pay to crowdfund a show and to receive a token as a keepsake – the fact that NFTs are transferable doesn’t mean they were “investment contracts.”

This is the exact point made by SEC Commissioners Mark T. Uyeda and Hester M. Peirce in their recently published dissent, where they said if what Stoner Cats 2, LLC, did was illegal then so was selling “Star Wars collectibles…in the 1970s” as well as a whole range of activities literally currently sustaining “artists, creators and entertainers” today.

All of which only makes the SEC action all the more absurd than it sounds. Here is a project that did what it set out to do, where it’s not be proved that original investors have been harmed and where the solution being set up doesn’t seem to help anyone.

And the world would have happily forgotten about it, but because there are celebrities attached to this particular project the SEC has decided to make an example out of them.