Last week, Corp Fin issued a new statement providing its views on whether “meme coins” were securities or, if offered and sold, involved securities transactions. Meme coins are more like collectibles, the staff explained, with “limited or no use or functionality.” What’s more, Corp Fin concluded, “transactions in the types of meme coins described in this statement[] do not involve the offer and sale of securities under the federal securities laws.” But application of the staff’s guidance here might be trickier than it may appear at first glance: a footnote indicates that Corp Fin’s “view is not dispositive of whether a specific meme coin itself is a security or whether it is offered and sold as part of an investment contract, which is a security. A definitive determination requires analyzing the specific facts relating to the meme coin and the manner in which it is offered and sold.” According to Commissioner Caroline Crenshaw in her response statement, the staff guidance provided “an incomplete, unsupported view of the law to suggest that an entire product category is outside the bounds of SEC jurisdiction.”
Note that the SEC has announced that its Crypto Task Force will host a series of roundtables to discuss key areas of interest in the regulation of crypto assets, with the first event beginning on March 21.
Corp Fin statement. A “meme coin,” according to the staff, 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.” (“Crypto assets” are defined as “assets that are issued and/or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called ‘virtual currencies,’ ‘coins,’ and ‘tokens,’ and that rel[y] on cryptographic protocols.”) Meme coins are typically “purchased for entertainment, social interaction, and cultural purposes, and their value is driven primarily by market demand and speculation.” As such, the staff likens meme coins to collectibles, with “limited or no use or functionality.” In light of their speculative nature, they “tend to experience significant market price volatility, and often are accompanied by statements regarding their risks and lack of utility, other than for entertainment or other non-functional purposes.” Transactions in meme coins of this nature, the staff concludes, are just not securities transactions and, as a result, do not need to be registered or exempt under the Securities Act.
Taking a deeper dive, the staff reasoned that a meme coin does not meet the definition of “security” under Section 2(a)(1) of the Securities Act or Section 3(a)(10) of the Exchange Act; it is not “any of the common financial instruments specifically enumerated in the definition of ‘security’ because, among other things, it does not generate a yield or convey rights to future income, profits, or assets of a business. In other words, a meme coin is not itself a security.” Nor, examining the “economic realities,” does the offer and sale of meme coins involve an “investment contract” under the test presented in SEC v. W.J. Howey Co.—an “investment in an enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” Decisions interpreting 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.’”
Applying the Howey test, the staff concluded that “the offer and sale of meme coins does not involve an investment in an enterprise”: purchasers of meme coins are not pooling their funds “to be deployed by promoters or other third parties for developing the coin or a related enterprise.” Nor are purchases and sales of meme coins made with a ”reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others”; rather, the “value of meme coins is derived from speculative trading and the collective sentiment of the market, like a collectible. Moreover, the promoters of meme coins are not undertaking (or indicating an intention to undertake) managerial and entrepreneurial efforts from which purchasers could reasonably expect profit.” To illustrate, the staff cites as an example efforts by promoters “limited primarily to hyping the meme coin on social media and online forums and getting the coin listed on crypto trading platforms”; in that event, “there are not likely to be sufficient indicia to establish that purchasers had a reasonable expectation of profits based on the efforts of the promoters.”
However, the staff cautioned, this statement is inapplicable to “the offer and sale of meme coins that are inconsistent with the descriptions set forth above, or products that are labeled ‘meme coins’ in an effort to evade the application of the federal securities laws by disguising a product that otherwise would constitute a security. As noted above, the Division will evaluate the economic realities of the particular transaction.” And don’t forget that fraudulent conduct involving meme coins could still be subject to enforcement or prosecution by other agencies under other laws.
Crenshaw response: “What does it meme?” In her response, first, Crenshaw asked, “what basis do we have to determine whether something is a meme coin? The guidance offers no clear definition from law or even a basic dictionary.” The characteristics used to describe a meme coin—an asset “reflective of online or social trends, of speculative value, that tends to experience high volatility” are “near universal hallmarks of crypto assets. The lack of a useful definition 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.” And regardless of the definition, she suggested, “the label is largely irrelevant to whether something is offered and sold as a ‘security’ under the SEC’s remit.” Instead of applying Howey to analyze the “reasonable expectations of meme coin purchasers,” in her view, the guidance just “suggests promoters can get around Howey with disclaimers or other window dressing designed to downplay the significance of managerial efforts.”
Although the guidance “paints meme coins as cultural projects,” in reality, “like any financial product, [they] are issued to make money,” whether just from sales by promoters or by “holding a significant portion of the token supply as its value increases. The linked fortunes of purchasers and promoters—who will both make money as the coin value goes up—may itself satisfy Howey’s requirement of a ‘common enterprise.’” She also took issue with the notion that the expectation of profits from meme coins would not be based on the efforts of others. Rather, she argued, there are often efforts by promoters to impact or even manipulate demand, to make sales based on “express promises of what courts have described as managerial efforts, such as getting a coin listed on crypto exchanges,” or by promoting meme coins that blend “meme culture with highly ambitious future plans,” or “promises of a ‘long-term vision that extends far beyond the hype,’ including things like a ‘massive ecosystem,’ technology improvements, or AI elements, just to name a few.” These types of “sophisticated efforts,” she contended, are not necessarily “outside the norm.”
Crenshaw concluded that “[r]egardless, the individualized inquiry Howey requires simply cannot be reconciled with the staff’s conclusion that offers and sales of a vaguely defined category, consisting of hundreds of unique crypto assets, are generally not securities. This guidance is not a reasoned interpretation of existing law. It raises more questions than it answers about what a meme coin is and whether that is a definable or useful categorization for purposes of the existing securities laws. It boils down to a broad statement of general principles that provide little clarity or predictability as to any given coin.”
