Qualitative Meme Coin: How the US SEC views Meme Coin

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

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 a passionate online community to purchase and trade the meme coins. Although individual meme coins may have unique features, 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 generally have limited uses or functions 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 regarding their risks and lack of utility, except for entertainment or other non-functional purposes.

The U.S. SEC's Division of Corporate Finance believes that transactions of the type of Meme coins described in this statement do not involve the issuance and sale of securities under federal securities laws . Therefore, persons involved in the issuance and sale of Meme coins do not need to register their transactions with the U.S. Securities Commission under the Securities Act of 1933 (the "Securities Act"), nor do they need to comply with the registration exemption provisions of the Securities Act. Therefore, buyers and holders of Meme coins are not protected by 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 various financial instruments, including “stocks,” “notes,” and “bonds.” Memecoins do not constitute any of the common financial instruments specifically listed in the definition of “security” because Memecoins do not generate income or convey rights to future income, profits, or corporate assets.

In other words, MemeCoin itself is not a security.

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 a certain arrangement or instrument is an investment contract based on its “economic reality.”

In assessing the economic reality of a transaction, the Howey test considers whether there is an investment in the business that is based on a reasonable expectation of profits to be derived 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 material and are key managerial efforts affecting the success or failure of the business.”

The offer and sale of Meme Coins does not involve an investment in an enterprise, nor is it intended to reasonably expect to profit from the entrepreneurial or managerial efforts of others.

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

Second, any expectation of profit by Meme coin buyers does not come from the efforts of others. In other words, the value of Meme coins comes from speculative trading and the collective sentiment of the market, just like collectibles.

Furthermore, the promoters of Meme Coin have not performed (or indicated an intent to perform) any managerial or 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 assess the economic realities of a particular transaction.

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