The SEC has officially ruled that meme coins are not securities, saying that these digital assets lack any real-world function, yield, or enterprise backing. The decision, announced by the Division of Corporation Finance on Thursday, clarifies that transactions involving meme coins do not need to be registered under federal securities laws.
According to the SEC, meme coins are “akin to collectibles” and are typically bought for “entertainment, social interaction, and cultural purposes.” They do not provide ownership stakes, dividends, or rights to future profits, and their value is dictated by market demand and speculation alone.
Because of this, investors in these assets will not be protected under federal securities laws, and anyone trading them does so at their own risk. In its statement, the SEC said:
“As such, persons who participate in the offer and sale of meme coins do not need to register their transactions with the Commission under the Securities Act of 1933 (“Securities Act”) or fall within one of the Securities Act’s exemptions from registration. Accordingly, neither meme coin purchasers nor holders are protected by the federal securities laws.”
Meme coins fail the Howey Test
The SEC determines whether an asset qualifies as a security by applying the Howey Test, which originated from the SEC v. W.J. Howey Co. case. This test considers whether a transaction involves an investment of money in a common enterprise with an expectation of profit derived from the efforts of others.
In this case, the SEC has concluded that meme coins do not meet these conditions for two reasons. First, buyers are not investing in a common enterprise where their funds are being managed by promoters or developers to generate profits, said the SEC.
Second, any profits made from meme coins come from speculative trading rather than the efforts of a business or management team, said the SEC. The agency said that meme coin promoters are not taking “entrepreneurial or managerial efforts” that would directly impact the value of these tokens.
Additionally, the SEC pointed to Sections 2(a)(1) of the Securities Act and 3(a)(10) of the Securities Exchange Act of 1934, which define the term security and list various financial instruments such as stocks, bonds, and notes.
“In other words, a meme coin is not itself a security. The aforementioned statutory sections also provide that “investment contracts” are securities. Given that a meme coin is not itself a security, we conduct our analysis of whether a meme coin may be offered and sold as part of an investment contract under the “investment contract” test set forth in SEC v. W.J. Howey Co,” said the SEC in Thursday’s statement.
Since the SEC does not recognize meme coins as securities, anyone who buys, sells, or trades them will not be covered by federal securities protections. This means that investors cannot rely on the agency to intervene if they suffer losses due to market crashes or failed projects.
But the SEC also warned that its decision does not give meme coin projects a free pass. While these tokens are not considered securities, fraudulent activities related to their sale or promotion can still be prosecuted under other federal and state laws. The agency made it clear that:
“Fraudulent conduct related to the offer and sale of meme coins may be subject to enforcement action or prosecution by other federal or state agencies under other federal and state laws.”
Federal courts since Howey have explained that Howey’s “efforts of others” requirement is satisfied when “the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise,” said the SEC.
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