Qualitative Meme Coin: How the US SEC views Meme Coin

To provide more clarity on the application of federal securities laws to crypto assets, the SEC’s Division of Corporation Finance is issuing an opinion on “Meme coins.”

A “Meme coin” is a crypto asset that is inspired by an Internet meme, persona, current event, or trend, and whose promoters attempt to attract an enthusiastic online community to purchase the meme coin and participate in its trading. Although individual meme coins may have unique functionality, meme coins generally share certain common characteristics. Meme coins are typically used for entertainment, social interaction, and cultural purposes, and their value is primarily driven by market demand and speculation. In this respect, meme coins are similar to collectibles. Meme coins also typically have limited use or functionality or no use at all.

Given the speculative nature of meme coins, they tend to experience significant market price fluctuations and are often accompanied by statements about their risks and lack of utility, except for entertainment or other non-functional purposes.

The SEC’s Division of Corporation Finance believes that transactions in the type of meme coins described in this statement do not involve the offering and sale of securities under the federal securities laws. Therefore, persons engaging in the offering and sale of Memecoins are not required to register their transactions with the U.S. Securities Commission under the Securities Act of 1933 (the “Securities Act”) or to qualify for an exemption from registration under the Securities Act. As a result, purchasers and holders of Memecoins are not protected by the federal securities laws.

Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Securities Exchange Act of 1934 define the term “security” by listing a variety of financial instruments, including “stocks,” “notes,” and “bonds.” Memecoins do not constitute any of the common financial instruments specifically enumerated in the definition of “security” because Memecoins do not generate income or convey rights to future income, profits, or corporate assets.

In other words, Memecoins themselves are not securities.

The statutory provisions above also provide that “investment contracts” are securities. Given that Memecoins themselves are not securities, we analyze whether Memecoins can be offered and sold as part of an investment contract based on the “investment contract” test set forth in SEC v. WJ Howey Co. The Howey test analyzes whether certain arrangements or instruments are investment contracts based on their “economic reality.”

In assessing the economic reality of a transaction, the Howey test considers whether there is an investment in a business and whether that investment is based on a reasonable expectation of profits from the entrepreneurial or managerial efforts of others. Since Howey, federal courts have explained that the “efforts of others” requirement of the Howey test is satisfied when “the efforts of persons other than the investor are unquestionably significant and are key management efforts that affect the success or failure of the business.”

The offer and sale of Memecoins does not involve an investment in a business, nor is it for the purpose of reasonably expecting profits from the entrepreneurial or managerial efforts of others.

First, Memecoin purchasers are not investing in a business. That is, their funds are not pooled and used by the promoter or other third parties to develop the coin or a related business.

Second, any expectation of profits by Memecoin purchasers does not come from the efforts of others. That is, the value of Memecoins comes from speculative trading and the collective sentiment of the market, just like collectibles.

In addition, the promoters of Memecoins have not performed (or expressed an intent to perform) managerial and entrepreneurial efforts from which purchasers could reasonably expect to profit.

Notwithstanding the foregoing, this statement does not apply to offers and sales of Meme Coins that are inconsistent with the foregoing description or to products labeled “Meme Coins” for the purpose of evading the application of the federal securities laws by disguising products that would otherwise constitute securities.

As noted above, the Department will evaluate the economic realities of a particular transaction.

In addition, although offers and sales of Meme Coins may not be subject to the federal securities laws, fraudulent conduct related to offers and sales of Meme Coins may be subject to enforcement actions or prosecutions by other federal or state agencies under other federal and state laws.