SEC 'Laying Out Some Rules' as Regulator Fines Stoner Cats Creator: Lawyer

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. All right, the creator of the animated web series, Stoner Cats has agreed to pay the SEC a $1 million civil fine to settle charges that it conducted in unregistered securities offering. Stoner Cats has not admitted or denied any wrongdoing in settling charges. This comes two weeks after the SEC brought its first enforcement action against an NFT project. Joining us now to discuss the legal implications here is managing partner at Leichtman law. David Leichtman. Welcome to the show this morning, David. Good morning. All right. So the second NFT enforcement action here two weeks apart. Is this the beginning of more actions to come? Should NFT projects be worried here? Uh I, I think it, I think it may be, uh you know, I also think it's, you know, part of uh reviewing these various, you know, um settlement um orders, uh which is a heavily negotiated uh document but largely um uh written by the SEC staff uh are meant to give some amount of guidance to people in the future who are making these kinds of offerings. Now there are so many NFT projects out there, David, we have these two impact theory, stoner cats, both have noteworthy people behind them. Why do you think that the SEC chose to go after these two specific projects first? Well, I think one of the, one of the main um points here is that the folks involved in both of these uh two early enforcement actions had the means and wherewithal to hire sophisticated securities Council, um, in order to file the proper registration statements, you know, whereas if you're some kind of individual artist or a small rock band or something like that, you know, you might have an arts and entertainment uh lawyer, but you don't necessarily know that you need a securities lawyer and your arts and entertainment lawyer may not even occur to them. So I think, you know, what they're doing is they're, they're going after, um, in order to lay down, you know, for the future, what the rules are going to be that everybody will know about. Um, they're, they're laying, they're laying out some rules with some folks that, you know, probably should have uh been able to consult, consult with counsel. So speaking of those, those uh smaller artists, the musicians and, and uh, and designers, et cetera. What does this all mean for them? I, I, if I'm just a guy who's making a few J pegs and trying to sell them to, to pay my rent or, you know, I have a small band and I wanna, you know, I'm playing a gig at the local Clan broth lounge, uh, on Saturday night and this is the, this is the best I can do for extra money. Or does this mean I'm a securities dealer now? Pro probably not. Um, when, when you look at the facts that are laid out in the, in the Se C's settlement order, um, what you see is a whole host of facts indicating the degree of control, um and um sort of promotion that the sponsors of, of these NFTS um were engaged in. And I think the ordinary, um, you know, person or, you know, a small, small artist uh or artist group, um is not gonna be involved in all of the various um aspects of um of, of that. Something that was noteworthy with this and happened with the impact theory case. We learned about two weeks ago was that two commissioners, Hester Purse and Mark Ueda issued a dissent. Um What did you make of these now, 100% of NFT enforcement actions, albeit it's just two right now, have almost half of the commissioners issuing a dissent to say that they don't necessarily agree with what's going on here. What do you make of this? Well, they were, you know, essentially making the same point that Lawrence was just making, uh which is, you know, there might be a degree of unfairness here to, you know, individual artists um uh and c and creators of all of all types, uh which, you know, I think is, you know, a good, a good point. But again, what I think they're trying to do is, and they've been doing this really since 2017 when they issued an, an initial report um and some regulations and then in 2019, some guidance, they're trying to lay down down the rules of the road. Um and there, you know, ought to be at some point, you know, a very simple kind of registration statement that you can file because what they're most interested in is not shutting down the NFT markets or even slowing down, you know, the ability to, to, to, to issue and trade NFTS. But what they're trying to do is um you know, create an environment where there is sufficient disclosure for investors to understand uh the risks which I think are not, not, not very well um understood. Now in their example, um the dissenting um commissioners gave an example about Star Wars toy figures, which um uh you know, it was a good effort to make an analogy, but I think it's not a perfect analogy here because in that circumstance, right, Lucas films is actually the creator of, of, of the films and the characters, they may license the toy company, but it's really the toy company selling the collectibles um and not the creator of the work controlling that market. And then in the app market, the secondary market for collectibles and, and things like that, there's no resale royalty and there, there's no compensation that goes back to the original Creator Lucasfilms. So it's not, it's not really a perfect analogy. There, there might have been some other analogies that, you know, that, that could have been further thought through. Uh But, you know, they, they're certainly sounding the alarm that, you know, people need to pay attention, uh, you know, to this, um, you know, including, including, you know, smaller entities. So what are, what are the specifics that make the difference? I mean, you, you, you mentioned a little bit about the promotion aspect that uh stoner cats had cartoons, et cetera, the online and on and TV presence. But what exactly is it that distinguishes that stoner cats from, uh, your stone friend who's, who's making an album uh from the other kind of stoner cats? Yes. Yes. Um Well, I think, I think, um, there were a couple of things in a lot of different factors that, that go into this analysis under a test enunciated by the Supreme Court in 1946. Um, in a case called Howie. And basically in, in this circumstance, I think there were a few things that troubled the sec. One was, there was no limit on the number of NFTS you could buy um in this series and you only needed one to actually consume the content that you were that you were getting access to. And so, uh you know, if, if you think about it this way, people are there just only really buying the additional, you know, NFTS for the purpose of making some kind of investment gain for which they're relying upon the, the, um you know, initiator of the NF FT series to promote and put out content in the future as opposed to just buying something tangible, tangible in the, in the past. So I think that was, that was one aspect um a a about it that um that the sec in particular was concerned about. All right. And David, before we go, we want to play this clip. Actress Mila Kunis actually spoke to Coindesk TV about the project back in 2021 Kunis production company Orchard Farm Productions back to the cartoon series. Let's take a listen. Stoner Cats was a concept of a show that we wanted to put out on, you know, streaming or, or television broadcast and otherwise, and we were doing this during um quarantine during COVID and it became a really oversaturated market, the market of animation. And I was like, how do we stand out, how do we do something different and how do we not have to comply with, you know, rules and regulations when it comes to our show? We wanted it to be very loud and very specific and, and very honest and, and true to its nature. And um and Mario works with Ashton and they kept talking about this thing called NFTS and fts and fts. And I know I sound like a crazy person, but I was like, what is an NFT? So this is go like two years ago. I was like, what's an NFT? And um and so then I got a beautiful explanation as to what NFTS were. And I was like, wow, this doesn't make any sense. So cut to COVID happens stoner cats. And I was like, huh, I wonder if I can make this into an NFT. So, uh Maria lovingly was like, let me, let me help you out and um and helped, uh you know, take this little train and chuck it along in the world of tech and, and crypto and, and all the things that I knew nothing about. All right, Mila said there, how, how do we not comply with rules and regulations albeit? I think she's uh referring to broadcast rules and regulations because it is a little bit of a crass. So how would you advise um, creators who want to do the same thing? Um Who are thinking about NFTS who are maybe a step above uh Lawrence's example there. Should they do that? Should they be out there? Um getting a securities lawyer and registering with the sec A a again, I think it, I think it depends, he certainly should be getting advice from counsel, um, who are familiar both with the securities, um, laws and intellectual property, uh laws. And, you know, one of the sort of ironies of this is that, you know, in the ordinary art world, um, we don't have resale royalties, right? When the, when there's a sale on the secondary market and, you know, part of what is attractive for NFTS for creators is the ability to obtain resale royalties from the smart uh from the way smart contracts uh work. And so resale royalties are, are wonderful. But the more control that you exercise over future sales and the more that you involve yourself in promotion and, and marketing um of what you are suggesting to the purchasers, the benefits will be of, of investing in it as opposed to just trying to get your content out there, then the closer to that line, you're gonna be all right, David, we really gotta go. But do you have a ballpark figure um on what it would cost a creator to register an NFT as a security? Well, again, I think right now it's probably pretty expensive to hire the right lawyers and you know, because the SEC is still finding its way here, it may, you know, take some time when you submit the registration statement for the SEC to approve it. But I think as, as time goes on and hopefully, you know, rapidly there will develop, you know, forms, you know, that that can be used, you know, so you don't have to hire the biggest white to, you know, law firm in New York City or, or Los Angeles and, you know, other, you know, sort of less expensive, you know, council can, can assist you. I don't think we'll get to a point where you can do it yourself. Uh, but, you know, but maybe there will be law school clinics and things like that, that might arise that, that can help, that, you know, that can help help with this process. But I think we're at the beginning stages of this. And so right now it's, it's gonna be pretty expensive. David. Thanks so much for joining us and um unpacking that for us. Thank you that was managing partner at Leichtman law. David Leichtman.