SEC says meme coins aren’t securities

Investing.com -- In a recent effort to elucidate the application of federal securities laws to crypto assets, the Division of Corporation Finance at the Securities and Exchange Commission (SEC) has shared its views on "meme coins." Meme coins are a variety of crypto asset inspired by internet memes, characters, current events, or trends. Promoters of these coins aim to attract a vibrant online community to buy and trade the meme coin.

Typically, meme coins are bought for entertainment, social interaction, and cultural purposes, with their value primarily driven by market demand and speculation, making them similar to collectibles. They often have limited or no use or functionality and are known for their significant market price volatility.

The Division has stated that transactions involving the types of meme coins described do not constitute the offer and sale of securities under federal securities laws. As a result, individuals involved in the offer and sale of meme coins are not required to register their transactions with the Commission under the Securities Act of 1933 nor fall within one of its exemptions from registration. Therefore, buyers and holders of meme coins are not protected by federal securities laws.

The Securities Act and the Securities Exchange Act of 1934 define "security" as various financial instruments, including "stock," "note," and "bond." However, a meme coin does not fit into any of these financial instruments’ definitions as it does not generate a yield or convey rights to future income, profits, or assets of a business. Therefore, a meme coin is not considered a security.

The SEC uses the "investment contract" test from SEC v. W.J. Howey Co. to determine if a meme coin can be offered and sold as an investment contract. The test examines the economic realities of a transaction, considering if there is an investment in an enterprise based on a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others.

The offer and sale of meme coins do not involve an investment in an enterprise, nor is it undertaken with a reasonable expectation of profits derived from the efforts of others. The value of meme coins is derived from speculative trading and the collective sentiment of the market, similar to a collectible.

However, this statement does not apply to the offer and sale of meme coins that do not align with the descriptions provided or products labeled as "meme coins" to avoid the application of federal securities laws. The Division will evaluate the economic realities of each transaction.

While the offer and sale of meme coins may not fall under federal securities laws, fraudulent conduct related to the offer and sale of meme coins could be subject to enforcement action or prosecution by other federal or state agencies under other laws.

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