They called it "red smoke". A breakthrough at a lab known for its innovative chemical research, financed by a corporation specialising in relaxation and entertainment products. It was a red, sweet-smelling substance that could be made as either an oil or a powder; when burned, it produced a dark red soporific gas that never failed to induce a deep, restful sleep accompanied by startlingly vivid, pleasant dreams.
The corporation pounced on it, touting it as a miracle sleep aid -- it not only cured insomnia, but guaranteed good dreams. It was quickly packaged it into toys for kids and as incense sticks and spray dispensers for adults. But, after a few months, all products were recalled and the corporation did its best to bury the memory of red smoke. It seems it had been commercialised before all the tests were complete, and it did not work quite as advertised.
Oh, it certainly induced restful sleep. But the accompanying dreams were not always "good". It would be a stretch to frame them as nightmares as within the dream the person never felt scared or threatened; it was only upon awakening that they felt the dream had been weird or uncomfortable. The lab that had created red smoke speculated that these were expressions of repressed desires that the person's waking mind was not prepared to deal with; though some suggested that there was something... paranormal at play, and an entity was trying to manipulate people.
This much was public knowledge, to those who followed the small controversy; "inappropriate" or "disturbing" dreams were common customer complaints leading up to the recall, and the company was not able to squelch all discussion of it completely. However the company did manage to keep the true nature of red smoke a secret, citing industrial secrets and preventing any independent lab from analysing the substance.
What the company was able to squelch almost completely were the rumours that the dreams were not just dreams. That their effects lingered even on awakening. That the red smoke was transforming people into manifestations of their own dark or erotic fantasies. This was so absurd that the company's flat denial was taken at face value by every news source except crazy tabloids.
The thing is, that these rumours were true. Those who had used the smoke for a long time knew they were true. The lab, which continued testing the stuff, knew it was true. The higher-up executives, who had been informed by the lab that the odd complaint of growing boobs or an animal tail were true and had been replicated by them, and consequently recalled the product and paid off those affected to keep quiet, knew it was true.
Testing was suspended -- over the objections of the scientists who wanted to continue to explore the nature and possibilities of this strange compound with the ability to make fantasy reality. The corporation was in the business of making money, not messing with reality; and they judged it safer for people's dreams to stay in their heads. Some time later even the tabloids forgot about it; and the company thought they had safely swept it under the rug.
They were wrong.