Qualitative Meme Coin: How the US SEC views Meme Coin

Source: U.S. SEC; Compiled by: Golden Finance

To more clearly illustrate the application of federal securities laws to crypto assets, the U.S. SEC's Division of Corporation Finance is issuing an opinion on "Meme Coins."

"Meme Coins" are crypto assets that are inspired by Internet memes, characters, current events or trends, and whose promoters attempt to attract enthusiastic online communities to purchase meme coins and participate in their transactions.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 typically have limited uses or functions or no use at all.

Given the speculative nature of MemeCoins, 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 SEC’s Division of Corporation Finance has determined that transactions in MemeCoins of the type described in this statement do not involve offers and sales of securities under the federal securities laws. As a result, persons engaging in offers and sales of MemeCoins are not required to register their transactions with the SEC under the Securities Act of 1933 (the “Securities Act”) or to qualify for an exemption from registration under the Securities Act. As a result, purchasers and holders of MemeCoins are not afforded the protection of the federal securities laws.

Both 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 a variety of financial instruments, including “stocks,” “notes,” and “bonds.” Meme coins do not constitute any of the common financial instruments specifically enumerated in the definition of “security” because Meme coins do not generate income and do not convey rights to future income, profits, or corporate assets.

In other words, Meme coins themselves are not securities.

The statutory provisions above also provide that “investment contracts” are securities. Given that Meme coins themselves are not securities, we analyze whether Meme coins 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 a business and whether that investment is based on a reasonable expectation of profits 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 significant and are key management efforts that affect the success or failure of the business.”

The offer and sale of Meme Coins does not involve an investment in a business, nor is it based on a reasonable expectation of profits from the entrepreneurial or managerial efforts of others.

First, Meme Coin purchasers 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 profits by Meme Coin purchasers is not derived from the efforts of others. That is, the value of Meme Coins derives from speculative trading and the collective sentiment of the market, just like collectibles.

In addition, the promoters of Meme Coins have not conducted (or indicated an intent to conduct) managerial and 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 descriptions above, or to products that are labeled “Meme Coins” for the purpose of evading the application of the federal securities laws by disguising products that would otherwise constitute securities.

As described above, the Department will evaluate the economic reality 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.

For more information, please contact the SEC's Division of Corporation Finance's Office of the Chief Counsel by submitting a web request form.