Crypto Critics' Corner

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Episode 132 – NFTs are Securities

Are NFTs securities? – Crypto Critics' Corner

Today Bennett and Cas discuss the SEC's settlement with the creators of an NFT called Stoner Cats and whether or not it means any NFTs offering royalties to creators could be considered securities.

Cas Piancey and Bennett Tomlin discuss the recent SEC lawsuits against Impact Theory and Stoner Cats. Both were NFT media projects that to different extents promised rewards to investors and have now settled with the SEC. Stoner Cats was a Mila Kunis project that featured Ashton Kutcher and Chris Rock as actors.

This episode was recorded on September 20th, 2023.

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English Transcript:

00:00:05:10 - 00:00:27:02
Cas Piancey
Welcome back, everyone. I am Cas Piancey. I'm joined, as usual, by my partner in crime. We've already recorded one today. I'm not going to play pretend and say I haven't asked you how you're doing. You're doing good. I'm doing good. We're going to be talking about NFTs and whether or not they're securities, or at least whether or not the SEC thinks they're securities, when they think they're securities and why they think they might be securities.

00:00:27:02 - 00:00:46:04
Cas Piancey
Right. And the reason this got brought into everyone's sort of line of sight is because an NFT collection called Stoner Cats that had been started or at least co-founded by Mila Kunis, and I think Ashton Kutcher was in on that as well. I'm not I don't remember. I think Mila Kunis was the face of it, but I think they were both involved.

00:00:46:04 - 00:01:18:01
Cas Piancey
And some other co-creators created this thing called Stoner Cats. And now Stoner Cats was this collection of images of what it sounds like stoned cats and cool, super, super awesome weed and cats. Very funny. And they decided they were going to do a show, a web series based on this. And they I went through the documents actually, they had they promised some pretty specific things, including that they were going to do at least one episode for three seasons, something like that.

00:01:18:01 - 00:01:41:05
Cas Piancey
Obviously, they they didn't do that. And part of the issue appears to be that the way these NFTs work and many NFT for that matter, is that they offered royalties to the initial founders and creators of these NFTs. What that entails is that every time someone buys one of these NFTs, they get like a 2.5% kickback on that sale, which doesn't sound like much right out the gate.

00:01:41:05 - 00:01:54:04
Cas Piancey
But considering volume and all this other stuff, you end up going like, Oh, they made like a half a million dollars in royalties like that, which is a lot of money. They also sold out of all of their NFT is when they put them on the market. Whether or not they bought a bunch of those I think is up for debate.

00:01:54:05 - 00:02:10:22
Cas Piancey
But basically the SEC said, Hey, you guys are doing these royalties on these NFT is this is a security. And to be clear, the people who did this said, well, okay, well, we're done. You win. We're not going to admit fault, We're not going to admit guilt here. You guys can just take some money, we’ll pay the fine, and we'll stop doing the Stoner Cats.

00:02:11:00 - 00:02:35:00
Cas Piancey
For what it's worth, I don't think you can actually buy them anywhere right now. Maybe it's just because there's nothing up for sale after the SEC took this action, the floor price increased 250%. It's still up 175% since before the SEC action And the volume went up, I think almost 3,000%. So everyone started buying it and trading it and moving them around.

00:02:35:00 - 00:02:59:23
Cas Piancey
As soon as this s.e.c. Action was was pushed out, i think this kind of sec action is similar in my mind to the EOS action that took place. In case anyone is unfamiliar with EOS. This was a Brock Pierce and Daniel Larimer project from years ago that was going to change the financial system and raised $4 billion from their ICO and then got fined by the SEC.

00:03:00:02 - 00:03:16:23
Cas Piancey
I believe it was $24 million. Who gives a shit? No one cares about that $24 million fine when you've raised billions of dollars and I think everybody understood that when it happened. And to me this feels kind of similar, right? So these guys raised, I believe it's something like 8 to $9 million, including these royalties that they got.

00:03:17:00 - 00:03:31:15
Cas Piancey
And they were fined, I don't know, a few million. They made a profit for sure. They profited on this 100% sure. And what they're getting out of it ultimately is that they don't have to fight the SEC now. They don't have to pay legal fees. And the SEC gets oh, look, see, they're not willing to fight us on this.

00:03:31:15 - 00:03:36:08
Cas Piancey
So this means NFTs are securities. That's not the full story. Bennett Why don't you jump in here now?

00:03:36:08 - 00:03:36:15
Bennett Tomlin
Well, it's

00:03:36:15 - 00:04:06:06
Bennett Tomlin
interesting. So Stoner Cats is the second NFT case that the SEC pursued. Like a week or two weeks before they pursued Stoner Cats they went after Impact Theory, which was a smaller NFT project, less illustrious names involved. And the creators of that NFT project kept telling their investors that they could get tremendous value and that they were going to make sure that we do something that by any reasonable standard, people get a crushing, hilarious amount of value.

00:04:06:12 - 00:04:46:14
Bennett Tomlin
And they even told these people buying their NFTs that these NFTs were the mechanism by which communities will be able to capture economic value from the growth of the company. They support. This one again settled with the SEC and may more clearly be a security than Stoner Cats. And I think this is what kind of gets interesting here is even in the Impact Theory case I just discussed, there were two SEC commissioners who disagreed, Commissioners Peirce and Uyeda did not support this and wrote their own digression and they highlighted that the SEC does not routinely bring enforcement actions against people that sell watches, paintings or collectibles, along with vague promises to build the brand and

00:04:46:14 - 00:05:10:01
Bennett Tomlin
increase the resale value. What I thought was interesting and what you and I had a brief conversation about is Preston Byrne, who we've had on the podcast before, wrote a blog post taking a look at these two cases. And his stance was basically that the Impact Theory one I just discussed, did seem more clearly like a security in the way it was marketed, in the way it was sold, and in the expectations investors reasonably had.

00:05:10:04 - 00:05:35:02
Bennett Tomlin
But he thought that the Stoner Cats one was less clearly a violation of securities law. Peirce and Uyeda again highlighted that this was an example of ban crowdfunding, and Preston pointed towards how this was not presented in that same way to purchasers. And so I think Stoner Cats is one where they kind of wanted to go after it because there were so many celebrities involved.

00:05:35:07 - 00:06:05:18
Bennett Tomlin
Mila Kunis was involved. As you mentioned, Ashton Kutcher was an actor, Chris Rock was an actor. There were names involved here. And you want to discourage that caliber of name from doing this type of project so ou go for a ticky-tacky settlement. But more broadly, what we're looking at in both these two cases is that making your badly formed project in which you hope to return value to people who give you money an NFT instead of some other form of token does not mean you'll avoid the SEC’s attention.

00:06:05:18 - 00:06:24:07
Cas Piancey
Right. And so I think a big part of this has been the royalty aspect the SEC has been honing in on. And I want to be clear here for everyone, because I think it's a it's a pretty important distinction in my mind. And we'll see. I don't know if this will actually play out in court. It might be that what I'm saying is totally off of key and wrong.

00:06:24:07 - 00:06:51:02
Cas Piancey
Again, we are not lawyers. Two industries that instantly come to mind when when I think of royalties is TV and movies and music right in those two industries, royalties play a pretty big role. We're watching a WGA strike, a Writers Guild of America strike go on right now, particularly because of royalties. The writers can't get royalties on streaming anymore because these streaming services don't offer the market data to even give them any of these royalties.

00:06:51:02 - 00:07:16:18
Cas Piancey
Right. But this has been livelihoods for decades for actors, writers, producers, whatever. They they all have been able to make money on these royalties forever. There's a fair argument to be had that if you're NFT is a TV like thing, which I guess you could argue Stoner Cats was that that the royalties in a sense make sense. I think that you need to do more probably than seven episodes.

00:07:16:18 - 00:07:37:12
Cas Piancey
I don't know. It would be up for debate. I don't know. I don't know where that would where that would come in. But the second one that I want to talk about is musicians where like again, record sales indeed do give you royalties for the rest of your career if you have the rights to the songs and all that and I know someone on that, I follow on Twitter who actually I like a lot of the songs that he puts out there.

00:07:37:12 - 00:07:55:19
Cas Piancey
Jonathan Mann I follow him. I find a lot of his music entertaining. It's silly and he he turns a lot of it into NFTs He does royalties as well for that. And I, I get it. I actually get that. I'm like, Oh, well, that makes sense. Counter to this is the sale of art pieces is the sale of painting.

00:07:55:19 - 00:08:16:04
Cas Piancey
If I buy a painting from a painter, you know what happens when I resell that painting? Whether I resell it for a profit or loss? Do you do you want to guess how much of the money I make on that resale? The painter gets zero zero. They do not receive anything for collectibles. You talk about Pokémon cards. How much does Namco get when I resell a Pokemon card?

00:08:16:05 - 00:08:16:20
Cas Piancey
Zero.

00:08:16:21 - 00:08:17:06
Bennett Tomlin
Sure, sure.

00:08:17:07 - 00:08:23:22
Cas Piancey
They don't get anything. So the royalties and that aspect. I do understand why they're trying to say they're security. It's a dividend.

00:08:23:22 - 00:08:47:03
Bennett Tomlin
And Preston highlights part of this in the blog post. And like imagine I paint a picture and there's someone who wants to buy it for $10,000 and I say, What if instead I sell it for you for $1,000 and 10% of any of whatever you end up selling it for in the future? Right? That doesn't make the painting itself a security right.

00:08:47:07 - 00:08:47:18
Bennett Tomlin
And I say.

00:08:47:18 - 00:08:52:22
Cas Piancey
How many of those agreements exist? I would love to know because that is not a common agreement.

00:08:53:00 - 00:09:16:08
Bennett Tomlin
And what is the answer is probably non zero, right? Like, well, and often that's not how artist kickbacks work. Great. The way it generally works is an artist sells some pieces to a collector at a lower price and then one like a halo piece at a higher price, which then revalues the entire collection. So then the collector is able to make the money on that, and the artists are then able to sell future pieces at a higher price.

00:09:16:09 - 00:09:17:12
Cas Piancey
Not that that's a good thing.

00:09:17:14 - 00:09:21:12
Bennett Tomlin
I don’t think an arrangement in the way I describe make it necessarily a security.

00:09:21:12 - 00:09:26:07
Cas Piancey
The art market is bred for money laundering and tax evasion. Like that's that's what the art market is for.

00:09:26:11 - 00:09:29:03
Bennett Tomlin
I mean we literally just described market manipulation.

00:09:29:04 - 00:09:29:07
Cas Piancey
Yes.

00:09:29:08 - 00:09:33:03
Bennett Tomlin
It’s just it's not illegal because it's a collectibles market.

00:09:33:03 - 00:09:57:18
Cas Piancey
And the tax the tax shit, donating it to museums, doing all the all sorts of weird, scammy shit in the art market. I'm not trying to deny that at all. But if we're going to try to make kind of strict lines in the sand about what a security is, I do want to say that when you're getting kickbacks on every sale of a painting that sounds so much more like a dividend to me in a securities offering than it does the way a normal art market works.

00:09:57:18 - 00:10:16:22
Cas Piancey
And royalties don't sound that way to me, they really don't treat it. It's a dividend, but it's not. It's not. It's basically saying like, okay, you did this work in this thing years ago, and if you have to repay a whole team because it's not it's not an individual taking full credit for it. It's writers, actors, producers, directors.

00:10:16:22 - 00:10:39:17
Cas Piancey
It's the grip, it's the lighting guy, it's it's everybody. And the same for a musician as well. Usually I think that's democratized a bit, but for a musician as well, you're going into a studio, you're working with a producer, you're working with a whole band, you're working with all of these different people who hopefully are going to be receiving some sort of monetary compensation forever for the work that they've done for this thing.

00:10:39:17 - 00:10:56:22
Cas Piancey
And again, the art market is not the same as that. Maybe we see some changes in this, maybe it becomes less regulated. Maybe they or they regulate the royalties aspects of these industries further. I don't know, but I'm trying to explain, there is there is a difference between these industries in the real world.

00:10:56:22 - 00:11:14:19
Bennett Tomlin
Sure. I think kind of just to put a cap on this, there's two things I want to kind of accentuate. Stoner Cats, to me, seems like the SEC trying to make a case, like we said, because there's these names involved and they want to discourage that kind of thing. I think the art market gets away with a lot because everyone involved is probably like an accredited investor, right?

00:11:14:23 - 00:11:45:23
Bennett Tomlin
Because rules there are already kind of loose. So they're not they don't really care. This is open to retail, you know, so they care a little bit more. The other thing I want to emphasize is there's some amount of ambiguity here in terms of whether or not this type of structure is or is not a security. But broadly, many NFT projects now need to deal with the reality that they may be considered a security by the securities regulator and need to deal with either litigating that or otherwise dealing with the consequences.

00:11:45:23 - 00:12:12:04
Cas Piancey
Well, that's going to do it for this episode. Everybody, if you want to support us, obviously there's doing the normal thing of like liking the video, rating it and reviewing it. But alternatively, we're putting out a new CasCoin cat collection. It's going to be an NFT thing. It's really cool cause ten CasCoin each for every CasCoin cat and what you get is unlimited access to the new CasCoin Cat TV show.

00:12:12:04 - 00:12:23:19
Cas Piancey
Anyway, there's a 10% royalty that gets kicked back to CCC, so we're going to be seeing a ton of money from that, and we're kind of banking on that for the future of the show. Remember, look it up on on Blur and on Opensea. Okay, guys.
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