In a stated effort to provide greater clarity on the application of federal securities laws to “crypto assets,” the Securities and Exchange Commission’s (SEC) Division of Corporation Finance has released its views on “meme coins.” In sum, while the offer and sale of meme coins may not be subject to federal securities laws, fraudulent conduct related to meme coins could still be subject to enforcement actions.
What Are Meme Coins?
In the staff statement, the SEC defines a “crypto asset” as “an asset that is issued and/or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called “virtual currencies,” “coins,” and “tokens,” and that relies on cryptographic protocols. Meme coins, in turn, are characterized as a type of crypto asset inspired by internet memes, characters, current events, or trends. While each meme coin may have unique features, they typically share certain characteristics:
- Entertainment and Social Interaction: Meme coins are often purchased for entertainment, social interaction, and cultural purposes.
- Market Demand and Speculation: The value of meme coins is primarily driven by market demand and speculation, making them akin to collectibles.
- Limited Use or Functionality: Meme coins generally have limited or no practical use or functionality.
- Market Price Volatility: Due to their speculative nature, meme coins tend to experience significant market price volatility.
Regulatory Perspective
The Division of Corporation Finance has determined that transactions involving meme coins, as described, do not constitute the offer and sale of securities under federal securities laws. Consequently, individuals participating in the offer and sale of meme coins are not required to register their transactions with the SEC under the Securities Act of 1933, nor do they need to fall within any exemptions from registration. As a result, meme coin purchasers and holders are not protected by federal securities laws.
Under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Securities Exchange Act of 1934, the term “security” includes various financial instruments such as “stock,” “note,” and “bond.” Meme coins do not fit within these categories as they do not generate yield or convey rights to future income, profits, or assets of a business. Therefore, meme coins are not considered securities.
The Division also applied the “investment contract” test from SEC v. W.J. Howey Co. to determine if meme coins could be considered securities. The Howey test evaluates whether there is an investment in an enterprise with a reasonable expectation of profits derived from the efforts of others. The Division concluded that meme coins do not meet this criterion for the following reasons:
- No Investment in an Enterprise: Meme coin purchasers are not pooling their funds to be deployed by promoters or third parties for coin or a related enterprise.
- No Expectation of Profits from Others’ Efforts: The value of meme coins is derived from speculative trading and market sentiment, similar to collectibles. Promoters of meme coins are not undertaking managerial or entrepreneurial efforts from which purchasers could reasonably expect profit.
This statement does not apply to meme coins that deviate from the described characteristics or to products labeled as “meme coins” to evade federal securities laws. The Division will evaluate the economic realities of each transaction. Further, although the offer and sale of meme coins may not be subject to the federal securities laws, fraudulent conduct related to the same may be subject to enforcement action or prosecution by other federal or state agencies.