SEC Corp Finance Division: Meme Coins Are Not Securities
Commentary by Steven Lofchie
In a "Staff Statement on Meme Coins," the SEC Division of Corporate Finance ("Division") said it would not regard transactions in "meme coins" as "involv[ing] the offer and sale[s] of securities under the federal securities laws."
The Division conducted an analysis as to "whether a meme coin may be offered and sold as part of an investment contract under the 'investment contract' test set forth in SEC v. W.J. Howey Co." Staff concluded that "the offer and sale of meme coins does not involve an investment in an enterprise nor is it undertaken with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others."
The Division defined a "meme coin" as "a type of crypto asset inspired by internet memes, characters, current events, or trends for which the promoter seeks to attract an enthusiastic online community to purchase the meme coin and engage in its trading." Staff explained that meme coins "typically are purchased for entertainment, social interaction, and cultural purposes, and their value is driven primarily by market demand and speculation ... Meme coins also typically have limited or no use or functionality."
The Division warned investors that such meme coins typically "experience significant market price volatility," particularly in light of the "lack of utility." The Division stated that the SEC would have to determine on a case-by-case basis whether any particular instrument came within their definition of a meme coin.
Commentary
SEC Commissioner Crenshaw criticized the staff's conclusion that meme coins are not securities (and therefore, companies that participate in their sale do not need to register their transactions with the Commission). She said it "advances an incomplete, unsupported view of the law to suggest that an entire product category is outside the bounds of SEC jurisdiction."
The Commissioner's attempt to define "meme coins" as "securities" because they are issued as part of an effort to make money reflects the position of the SEC under the previous administration. But it is incorrect as far as the traditional definition of the term "securities" in the securities laws. The fact that the sellers of an asset and the buyers have a common interest in the value of the asset rising does not make an asset a security. Otherwise, art galleries that sell paintings by artists that they promote and real estate developers that sell co-ops and houses in projects would be selling securities.