by T. GormanPosted on Posted in SECActions

Crypto assets such as bitcoin are purchased and sold each day. The assets are frequently in the form of a coin and may be attached to a blockchain. Over the last few years the number of different types of crypto assets has proliferated. Many have special rights and are part of a larger investment. Some are not. Depending on the characteristics, some crypto assets may be securities. Others are not. Most are controversial. Those involved in the action below were tied to a web series called the Stoner Cats. The coins linked to the series were securities, according to the SEC. In the Matter of Stoner Cats 2, LLC., Adm. Proc. File No. 321655 (September 13, 2023).

Respondent managed and produced the Stoner Cats web series. It also offered and sold the Stoner Cats NFTs to the public. Beginning in late July 2021 Respondent conduced an offering of non-fungible tokens called Stoner Cats crypto assets. The coins sold for about $800 each. The offering sold out in 35 minutes. It generated about $8.2 million.

The purpose of the Stoner Cats NFT offering was to fund the production of an animated web series called Stoner Cats. Investors were told that Respondent would develop the Stoner Cats web series using their money. SC2 promised investors that they would have exclusive access to the web series and an online community as well as future content.

Each Stoner Cats NFT was associated with a unique still image of one of the characters in the web series. Purchasers could not select the character. To the contrary, purchasers had no control over which character was reflected. About 62% of the purchasers bought more than one coin. About 20% resold the coin.

Respondent offered and sold the Stoner Cats NFTs as “investment contracts and therefore securities, pursuant to . . . ” the Court’s decision in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). The Commission has also issued a Section 21(a) report ,known as the DAO report ,regarding the application of Howey to crypto assets. Under Howey and the DAO report Respondent was required to registered the assets as securities. The failure to register, coupled with the sales, constituted a violation of Securities Act Section 5(a) and 5(c).

To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited above. Respondent will also pay a penalty of $1 million which will be distributed through a fair fund.

Tagged with: ,

by T. GormanPosted on Posted in SECActions

Marketing is frequently a key element for a business. It gives the company an opportunity to showcase its products to those who might be interested. While at times claims are exaggerated, or are what is sometimes called “puffery,” many members of the publich have been conditioned to listening to claims such as “the world’s best hamburger.”

Marketing is also a key issue for investment advisers. In that context, however, the claims often differ from those of a business selling the best burger. Indeed, the marketing conducted by investment advisers is subject to a number of rules promulgated by the Commission to protect investors. Presently, the agency is conducting a “sweep” to assure compliance with those rules. To date the agency has filed nine settled actions involving investment advisers and the marketing rules (here). The case below is typical of those actions.

In the Matter of Banorte Asset Management, Inc., Adm. Proc. File No. 3-21636 (September 11, 2023) is typical of these cases. Respondent has been a registered investment adviser since March 2019. The Huston, Texas based firm has about $139 million in regulatory assets under management.

This action centers on amendments to Advisers Act Rule 206(4)-1 that were adopted by the Commission in December 2020. The Commission set a deadline of November 4, 2022, for compliance. Under the amended Marketing Rule a registered investment adviser cannot include any hypothetical performance in an advertisement unless the firm adopts “and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement” under Rule 206(4)-1(d)(6)(i). Under this rule the Commission believed that advisers would not generally be permitted to include hypothetical performance in advertisements directed to a mass audience or for general circulation.

Following the compliance date Banorte published communications on its website that constituted advertisements which included hypothetical performance derived from models. The firm had not adopted policies and procedures designed to ensure that the performance was relevant to the likely financial situation and investment objectives of the intended audience. Accordingly, the firm violated Advisers Act Section 206(4) and Rule 206(4)-1(d).

In resolving the matter, the firm agreed to implement certain undertakings designed to ensure compliance with the amended Marketing Rule as to hypotheticals. The Advisory also consented to the entry of a cease-and-desist order based on the Section and Rule cited above and a censure. Respondent will also pay a penalty of $50,000.

Tagged with: ,