SEC Clarifies Meme Coins Are Not Securities Under Federal Law

SEC Provides Clarity on Meme Coins

The Securities and Exchange Commission (SEC) has issued guidance on meme coins, a type of cryptocurrency inspired by internet memes or trends. These coins are typically purchased for entertainment, social interaction, or speculation, rather than for functional use. Their value is driven by market demand and sentiment, similar to collectibles, and they often exhibit significant price volatility.

Key Findings from the SEC

The SEC's Division of Corporation Finance has determined that transactions involving meme coins do not constitute the offer and sale of securities under federal securities laws. As a result, individuals involved in the creation and sale of meme coins are not required to register their transactions under the Securities Act of 1933 or seek exemptions from registration. Consequently, buyers and holders of meme coins are not protected under federal securities laws.

The Howey Test and Meme Coins

The SEC applies the "investment contract" test from the landmark case SEC v. W.J. Howey Co. to determine if a financial instrument qualifies as a security. This test evaluates whether there is an investment in an enterprise with a reasonable expectation of profits derived from the efforts of others. Meme coins do not meet this criteria, as they do not represent an investment in an enterprise or rely on the efforts of others to generate profits. Instead, their value is driven by speculative trading and market sentiment.

Implications for Investors

While meme coins are not classified as securities, the SEC warns that fraudulent activities related to their promotion or sale may still be subject to enforcement action under other federal or state laws. The Division of Corporation Finance will continue to evaluate the economic realities of each transaction on a case-by-case basis.

This guidance provides clarity for investors and promoters of meme coins, while also emphasizing the importance of compliance with applicable laws to prevent fraudulent practices.