On February 27, in what is likely the first of many statements about crypto assets, the Staff of the U.S. Securities and Exchange Commission’s Division of Corporation Finance (the “Division”) posted a statement on Meme Coins (the “Statement”). In the Statement, the Division’s Staff shared its views that transactions in “meme coins,” which are “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,” do not involve the offer and sale of securities under the federal securities laws. Accordingly, offers and sales of such meme coins do not need to be registered or exempt from registration under the Securities Act of 1933, as amended, and those who transact in such coins do not have the benefit of protection under the federal securities laws.
The Staff opined that meme coins, which are speculative in nature and so prone to market price volatility, are generally like other collectibles, purchased for entertainment or other non-financial value. Buyers are notified of these risks–in other words, buyers should be aware that meme coins are for fun, rather than financial gain. The Staff went on to explain that a meme coin “does not generate a yield or convey rights to future income, profits, or assets of a business,” unlike the common financial instruments that are considered to be securities such as stocks, notes, and bonds.[1]
Because an “investment contract” can be a security, the Staff then considered whether a meme coin may be offered and sold as part of an investment contract (and therefore still be subject to the US federal securities laws). Under the test established by SEC v. W.J. Howey Co.,[2] the Staff evaluated the“economic realities” of the purchase and sale of meme coins, i.e., “whether there is an investment in an enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” The Staff answered this question in the negative because (i) purchasers are not making an investment in an enterprise (i.e., funds are not pooled together for a related constructive purpose), (ii) purchasers do not expect a profit based on the efforts of others; instead, value is derived from the speculative trading market described above, and (iii) meme coin promotors do not undertake “managerial and entrepreneurial efforts” that would lead meme coin purchasers to expect a profit. In sum, the Staff’s view is that meme coins do not satisfy any of the prongs of the test described in Howey.
The Division Staff clarified that the Statement only applies to meme coins meeting the description therein, and that the characteristics of a meme coin, not the name of the instrument, will control when determining whether or not a meme coin is a security. In addition, other federal and state laws governing fraudulent conduct continue to apply to the sale of meme coins, even though the federal securities laws do not.
Later that same day, Commissioner Caroline Crenshaw posted a rebuttal to the Statement. In her strongly-worded response, Commissioner Crenshaw characterized the Statement as an “incomplete, unsupported view of the law to suggest that an entire product category is outside the bounds of SEC jurisdiction.” Criticizing the Statement for its lack of a clear definition of “meme coin,” she continues by stating that that this shortcoming “alone makes the value of this guidance questionable, except perhaps as a roadmap for crypto enterprises looking to evade oversight by labeling themselves as a meme coin.”
In particular, Commissioner Crenshaw highlighted that fact that the Howey test (described above) focuses on the “economic reality” of a transaction, including whether there is a reasonable expectation of profits based on the efforts of others; an analysis that Commissioner Crenshaw believes the Staff declined to undertake. In her view, the “reality is that meme coins, like any financial product, are issued to make money” for both promoters and owners, not for a non-financially based entertainment value. Further, offerings, buybacks, promises of future exchange listings and other actions by promoters can and do impact the value of meme coins, perhaps satisfying the “efforts of others” detailed in Howey. Overall, in her opinion, the Statement is vague, “a broad statement of general principles that provide little clarity or predictability as to any given coin,” rather than a well-reasoned interpretation of the law.
Read the Statement here and Commissioner Crenshaw’s response here.
[1] See Sections 2(a)(1) of the Securities Act of 1933 and 3(a)(10) of the Securities Exchange Act of 1934 for a definition of the term “security.”
[2] 328 U.S. 293 (1946).