Stoner Cats 2 LLC settles SEC charges over unregistered NFT offering
The Securities and Exchange Commission (SEC) has announced that Stoner Cats 2 LLC (SC2) has agreed to settle charges that it conducted an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs).
The SEC’s order finds that SC2 offered and sold more than 10,000 NFTs for approximately $800 each on 27th July 2021. The order also finds that SC2’s marketing campaign highlighted the potential for investors to profit from reselling the NFTs on the secondary market, and that SC2 configured the NFTs to provide SC2 a royalty on each secondary market transaction.
As a result of these actions, the SEC found that SC2 violated the Securities Act of 1933 by offering and selling unregistered securities.
SC2 agreed to a cease-and-desist order and to pay a civil penalty of $1 million. The order also establishes a Fair Fund to return monies that injured investors paid to purchase the NFTs. SC2 also agreed to destroy all NFTs in its possession or control and publish notice of the order on its website and social media channels.
Notably, Commissioners Hester Peirce and Mark Uyeda also issued a joint statement disagreeing with the decision, arguing that applying the Howey investment contract analysis to NFTs lacks a clear and meaningful limiting principle, which could stifle creativity among artists and creators. Peirce and Uyeda also draw parallels to past instances like the sale of Star Wars collectibles in the 1970s and questions whether similar historical activities, such as the sale of “Early Bird Certificate Packages,” would have been classified as investment contracts under the current SEC analysis.
The dissenting view goes on to argues that while NFT creators and artists should not be exempt from securities laws, the SEC should be cautious in its application to avoid hindering artists’ ability to sell their work, engage with fans, and involve them in future creative projects.
SEC’s Gary Gensler testimony
SEC chair, Gary Gensler, recently spoke before the US Senate Committee on Banking, Housing and Urban Affairs. The testimony covered a lot of ground, but below we pick out the key elements.
- The speech began with a recognition of the SEC’s 90-year history and its role in overseeing federal securities laws.
- It emphasised the importance of the SEC’s core principles in contributing to America’s economic success and global standing.
The three-part mission of the SEC was highlighted:
- Protecting investors
- Maintaining fair, orderly, and efficient markets
- Facilitating capital formation
SEC’s enforcement actions:
- The speech mentioned that the SEC has filed approximately 750 enforcement actions in the past year.
- It also highlighted the extensive examinations conducted by the SEC, involving more than 40,000 registrants in various sectors of the financial markets.
- The speech acknowledged the challenges faced by the SEC in managing its workload, particularly with the growth in registrants and increased market complexity.
- Noting that, despite these challenges, the SEC’s workforce has not grown significantly in recent years.
Recognition and awards:
- The SEC is recognised as a top place to work among midsized federal agencies, which reflects its commitment to its staff and mission.
- The speech stressed the need for the SEC to adapt and update its rules to address the evolving technology and business models of the 2020s.
- The focus is on promoting market efficiency, integrity, and resiliency while considering the interests of investors and issuers.
- The speech discussed proposals related to securities lending, short sale disclosures, and large position reporting for securities-based swaps to enhance market efficiency and competition.
- Gensler also covered a proposal to harmonise price increments for stocks in different markets.
- Gensler highlighted rules finalised to improve transparency and integrity in the private fund industry.
- The aim is to protect investors and enhance competition in this sector.
Integrity and disclosure:
- Gensler noted the SEC’s role in ensuring that public companies provide accurate and comprehensive disclosures about material risks, including climate risks.
- A proposal for climate-related disclosure to bring consistency and comparability to such disclosures was mentioned, Gensler noting there are more than 15,000 comments for the regulator to review.
- Rules have been finalised to require public companies to disclose their risk management, strategy, and governance with respect to cybersecurity risks.
Resiliency: – The SEC has undertaken initiatives to enhance the resiliency of the capital markets, including shortening the settlement cycle and improving oversight.
Treasury markets: – The importance of the Treasury markets was highlighted, and proposals for enhancing registration and regulation and facilitating greater clearing were discussed.
Money market funds: – The testimony acknowledged the role of money market funds in providing investors with alternatives to traditional bank accounts and covered the introduction of rules to enhance their liquidity and protection.
Form PF: – Amendments to Form PF were mentioned, which now requires large hedge fund and private equity fund advisers to make current reports to the Commission. He also noted a joint proposal with the CFTC to improve the quality of the information the SEC receives from all Form PF filers, with a particular focus on large hedge fund advisers.
Gensler concluded by emphasising the need for the SEC to continuously adapt to changes in technology, markets, and business models to maintain the integrity and efficiency of the capital markets.
Ex CEO of financial services firm guilty of fraud
Roberto Gustavo Cortes Ripalda has pleaded guilty today to charges of defrauding clients of his financial services firm, Biscayne Capital. The case, as outlined in court documents, reveals a complex scheme that operated over several years, causing substantial financial losses to Biscayne Capital clients.
In 2005, Cortes founded Biscayne Capital, a financial services company, in FLorida. The fraudulent activities occurred between about 2013 and 2018 when Cortes, along with others, masterminded a scheme designed to deceive clients about their funds. The indictment alleges that clients were told their investments would support real estate projects, when in reality, the funds were redirected to cover various expenses, pay other Biscayne Capital clients, and enrich Cortes and his co-conspirators, resulting in millions of dollars in personal gains.
Additionally, Cortes and his associates allegedly invested clients’ money without their knowledge and attempted to conceal these actions by providing clients with falsified account statements. By September 2018, this fraudulent operation had crumbled, leading to the liquidation of Biscayne Capital and causing a staggering $155 million in losses to its clients.
Cortes pleaded guilty to conspiracy to commit wire fraud as part of a plea agreement. He has also agreed to a forfeiture judgment totalling $3.4 million. Cortes is scheduled to be sentenced in January 2024, and could face a maximum penalty of 20 years in prison.
A selected summary of key developments for regulated financial institutions
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