On February 27, 2025, the Securities and Exchange Commission (the “SEC”) issued a statement to provide clarity on the application of federal securities laws to crypto assets by declaring that “meme coins” do not fall under the definition of the term “security.”
According to an SEC statement from the Division of Corporation Finance (the “Division”), a “meme coin” is 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. Driven primarily by market demand, meme coins are usually purchased for entertainment, social interaction, and cultural purposes, but have limited use or functionality. Since meme coins do not generate a yield or convey rights of future income, profits, or assets of a business, meme coins do not fall under any of common financial instruments in the definition of the term “security” as defined by Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Securities Exchange Act of 1934. Furthermore, since a meme coin is not a security, people who offer and sell meme coins do not need to register their transactions with the SEC under the Securities Act of 1933 or fall within one of the Act’s exemptions from registration. This also means that meme coin purchasers and holders are not protected by federal securities laws.
Additionally, the statement delved into an analysis of why meme coins cannot be offered and sold as part of investment contracts using the “investment contract” test set forth in SEC v. W.J. Howey Co. The test evaluates whether certain arrangements or instruments are investment contracts based on their “economic realities.” The Division stated that meme coin purchasers are not making an investment into an enterprise, nor are any expectation of profits held by meme coin purchasers derived from the efforts of others, but the speculative trading and collective sentiment of the market. The Division further stated that their statement does not extend to the offer and sale of meme coins inconsistent with the descriptions in their statement, or products labeled “meme coins” to circumvent products that would constitute a security. Those participating in the market are warned of being subject to enforcement action or prosecution should they use meme coins as a means of fraudulent conduct.
Market participants are encouraged to continue monitoring developments in this sector as the new administration reshapes crypto policy.
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