SEC’s Division of Corporation Finance Clarifies Stance on Meme Coins

In a recent statement, the staff of the Securities and Exchange Commission’s Division of Corporation Finance has provided its views on the securities status of “meme coins.”¹ Meme coins are a type of crypto asset inspired by internet memes, characters, current events or trends and are primarily used for trading and entertainment purposes. Their value is largely driven by market demand and speculation, making them similar to traditional collectibles. Given their speculative nature, meme coins tend to experience significant market price volatility, and they are often accompanied by statements regarding their risks and lack of utility, other than for entertainment or other non-functional purposes.

The staff of the Division stated that transactions involving meme coins, as described above, do not constitute the offer and sale of securities under federal securities laws. Participants in meme coin transactions are not required to register their transactions with the SEC under the Securities Act of 1933 or seek exemptions from registration. Conversely, this status also means that meme coin purchasers and holders are therefore not afforded protections under federal securities laws.

The Division's analysis notes that a meme coin is not itself a security in part because it does not fall within any of the financial instruments enumerated in the definitions of a “security” in Section 2(a)(1) of the Securities Act of 1933, or Section 3(a)(10) of the Securities Exchange Act of 1934.  For example, unlike stock or bonds, meme coins do not generate yield or convey rights to future income, profits or business assets.

The Division also concludes that meme coins are not “investment contracts” under the test set forth in SEC v. W.J. Howey Co.² The Howey test examines the economic realities of a transaction and concludes that an investment contract (and therefore a security) exists where there is an investment in a common enterprise with a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. In its statement, the Division notes that meme coins are not investment contracts under the Howey test because:

1. meme coin purchasers are not investing in an enterprise, and their funds are not pooled together to be deployed by promoters or other third parties for developing the coin or a related enterprise; and
2. any profits from meme coins are derived from speculative trading and market sentiment, not from the managerial or entrepreneurial efforts of others.

Some Observations

The Division’s statement on meme coins provides significant clarity for a class of crypto assets that has sometimes been the focus of intense trading activity.  As such, it may be welcomed by the crypto industry, including by some issuers who have recently filed registration statements for proposed exchange-traded products based on meme coins.

However, the Division’s statement may also be of interest for several other reasons:

First, while the SEC appears to have recently taken a significantly more crypto-friendly turn,³ and the Howey test has been criticized by many as being overbroad in its application to crypto assets, the statement indicates that SEC staff will continue to apply the test to determine the security status of various crypto assets.  The staff’s view that trading profits are not based on the entrepreneurial efforts of others may undermine the SEC’s previous theory that encouragement of a secondary trading market by the issuer can meet this prong of the Howey test.⁴

Second, there are similarities between the staff’s current analysis of meme coins and its previous analysis of whether non-fungible tokens (NFTs) are securities, including the existence or maintenance of a secondary market for such products, and the artistic or entertainment element of these assets.  Unlike meme coins however, the SEC has so far taken the position that certain NFTs constitute investment contracts under Howey. It remains to be seen whether the meme coin statement could mark a different approach by the SEC to NFTs.

Third, and relatedly, the staff continues to emphasize Howey’s focus on the economic realities of a transaction, noting that the statement does not extend to the offer and sale of products that are labeled “meme coins” in an effort to evade the application of the federal securities laws by disguising a product that otherwise would constitute a security. 

Finally, the statement follows closely on the SEC’s establishment of a crypto task force headed by Commissioner Hester Peirce, who has noted the need for a “sensible regulatory path” that moves away from an approach perceived to be driven primarily by enforcement actions.⁵  Providing guidance on the securities status of different types of crypto assets is one of the objectives of this task force. The statement may therefore indicate a new crypto regulatory approach, in which staff guidance is more readily forthcoming and is broadly phrased to cover an entire asset class.