SEC’s Division of Corporation Finance provides clarity on meme coins
Recently, the Securities and Exchange Commission’s Division of Corporation Finance issued a statement regarding the classification of meme coins as securities under federal securities laws. Meme coins are a type of cryptocurrency inspired by internet memes, characters, current events, or trends, primarily used for trading and entertainment purposes. Their value is predominantly driven by market demand and speculation, much like traditional collectibles. The speculative nature of meme coins often results in significant market price volatility, with accompanying warnings regarding their risk and lack of utility beyond entertainment or non-functional purposes.
The Division clarified that transactions involving meme coins are not deemed the offer and sale of securities under federal securities laws. Therefore, participants in meme coin transactions are not required to register these transactions with the SEC under the Securities Act of 1933 or seek exemptions from registration. This lack of security status also means that meme coin purchasers and holders do not receive protections under federal securities laws.
According to the Division’s analysis, meme coins do not behave as securities due to their unique characteristics. Unlike stocks or bonds, meme coins do not provide yield or convey rights to future income, profits, or business assets. The Howey test, established by SEC v. W.J. Howey Co., examines the economic realities of transactions to determine whether an investment contract exists. The Division’s assessment of meme coins concludes that they do not meet the criteria to be considered investment contracts under this test. Profit from meme coins results from speculative trading and market sentiment, rather than the efforts of others.
The clarification on meme coins by the Division of Corporation Finance offers important insights into this subset of cryptocurrency assets, which have seen heightened trading activity recently. While the statement is likely welcomed by the crypto industry and issuers exploring exchange-traded products based on meme coins, it also raises significant points of interest.
The SEC’s stance on meme coins, coupled with its recent alignment towards a more crypto-friendly approach, establishes a precedent for the application of the Howey test to various crypto assets. The Division’s emphasis on profits not being derived from the entrepreneurial efforts of others may challenge the SEC’s previous interpretations related to secondary trading markets and the Howey test.
Additionally, the Division’s evaluation of meme coins can be compared to its previous assessments of non-fungible tokens (NFTs) as securities under Howey. While NFTs have been considered investment contracts by the SEC, meme coins have received a different classification, indicating potential shifts in regulatory approaches to different crypto assets.
Furthermore, the Division’s statement underscores the importance of the economic realities of transactions, cautioning against disguising products as “meme coins” to evade securities regulations. This guidance may form part of a broader regulatory approach by the SEC, particularly in light of the recent establishment of a crypto task force aimed at providing comprehensive guidance on the securities status of various crypto assets.
Therefore, the clarification by the SEC regarding meme coins offers valuable insights into the classification of these assets, providing a clear direction for the crypto industry and issuers navigating the evolving landscape of cryptocurrency regulations.
