Earlier this month, the United States Securities and Exchange Commission (SEC) announced its second-ever enforcement action against the creators of an NFT project—this time, against the team behind “Stoner Cats,” an NFT-backed web series from Mila Kunis’ production company that featured the vocal talents of Hollywood A-listers including Kunis, Ashton Kutcher, Chris Rock, and Jane Fonda. 

While the SEC’s first case regarding NFTs—against a media company that promised “massive” returns on its membership passes once it became “the next Disney”—raised relatively few eyebrows among industry experts given the cited claims, reception of the “Stoner Cats” announcement has been altogether different.

The case appears to have sent a shockwave through the expanding ecosystem of film and television projects seeking to leverage NFTs to raise funds directly from loyal fan bases, instead of depending on the hyper-centralized studio system for financing and distribution.

“It’s pretty awful and has me super worried,” the creator of an upcoming independent television series backed by NFTs told Decrypt on the condition of anonymity. Though this creator’s project, they say, has been vetted for any potential legal issues, they are now fearful—in the wake of the “Stoner Cats” action—of drawing attention to their project that could result in regulatory scrutiny. 

A key element of that fear has to do with the well-established opacity of the SEC’s approach to crypto and NFTs. The federal agency has not issued a single guideline or rule articulating what applications of NFTs it would consider legal; instead, the commission’s chair, Gary Gensler, has repeatedly stated that the agency’s lawsuits speak for themselves. It's regulation by enforcement.

Following the public announcement of the SEC’s action against "Stoner Cats," two of the agency’s own commissioners—Hester Peirce and Mark Uyeda—issued a harshly worded rebuke of the decision, arguing that it would hamper innovation and lead to uncertainty among creators.

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

This sentiment was shared among a number of independent television and film creators who spoke with Decrypt, and now wonder whether their NFT-backed projects will be next on the chopping block.   

“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, told Decrypt. “It's completely unfair for them to start issuing fines until they have specific laws in place for which we can all reference and adhere to.”

Winters runs Verified with numerous partners, including co-founder and “Napoleon Dynamite” actor Jon Heder. Together, their team has funded multiple television projects by selling NFTs to loyal fans that offer access to content and exclusive perks. Winters doesn’t think Verified’s projects, or “Stoner Cats” for that matter, should be reprimanded for the way they fundraised or engaged with their NFT holder communities. For this reason, he intends to push full steam ahead with Verified’s slate of projects.

“I know the team behind ‘Stoner Cats,’ and they delivered on their promise,” Winters said. “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.”

Others in the industry, however, feel the action against “Stoner Cats” was justified, given that the project publicly made claims that the more successful the show was, the more “successful” the NFTs would become as well.

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

But do NFT-backed media projects that don’t explicitly promise future profits for holders really have nothing to fear? 

Drew Hinkes, an attorney and adjunct professor at NYU who specializes in digital assets, was particularly intrigued by a paragraph in the SEC’s cease-and-desist order against “Stoner Cats” that looked awfully similar to language from the agency’s first order against an NFT offering last month.

In both cases, the SEC indicated that if an NFT project ever charged a creator royalty—a small fee paid back to the project every time one of the assets is resold—that project was more likely to constitute an illegally unregistered securities scheme. The vast majority of NFT projects have a royalty fee attached, typically between 2.5% and 10% of the secondary sale price.

To Hinkes, that apparent position could have far-reaching consequences for the NFT industry—not just for creators who champion the royalties as a means to support artists (despite fading enforcement), but for the NFT marketplaces that levy and enforce those fees. 

“You could read this as suggesting that marketplaces that facilitate 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 told Decrypt. “That's the implication of the position that the SEC is taking here.”

If NFT marketplaces were, per this logic, deemed securities exchanges by the SEC, they would not be permitted to operate without receiving the same type of registrations held by stock markets like the New York Stock Exchange and the Nasdaq. Such registrations are very rarely issued. 

Due to the SEC’s current, tight-lipped approach to crypto regulation, it may not be known for some time if the agency’s regulatory appetite is so expansive. But the uncertainty and fear stirred by its action against “Stoner Cats” is almost certain to seep beyond the tight-knit ecosystem of NFT-backed media projects—many billed as “Film3” projects.

To Hinkes, the SEC’s current behavior regarding NFTs is reminiscent of its approach to crypto. Though the agency first pursued crypto companies that flagrantly violated securities laws, it steadily expanded its scope until it had sued virtually every major crypto exchange with a presence in America.

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