As a result, transactions involving meme coins do not require SEC registration under the Securities Act of 1933 and do not fall under the same regulatory protections as traditional securities.
,The statement comes after US President Trump released his own meme coin, $Trump, shortly before coming into office, which promptly crashed.
,Defining meme coins
,Meme coins are a category of crypto assets inspired by internet memes, characters, current events, and trends, often purchased for entertainment, social engagement, or cultural significance.
,“Meme coins are akin to collectibles,” the SEC explains, and “also typically have limited or no use or functionality” beyond entertainment or social purposes, with their value being driven by market demand and speculation. Given their speculative nature, meme coins often experience significant market price volatility, with frequent warnings about their risks.
,SEC rules out meme coins as securities
,According to Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Securities Exchange Act of 1934, ‘securities’ include financial instruments such as stocks, bonds, notes, and investment contracts. The SEC determined that meme coins do not fit this definition of a security because among other things, they do not generate yield, convey rights to future income, profits, or assets of a business.
,The SEC also applied the legal standard set by the SEC v. W.J. Howey Co. case, known as the ‘Howey Test’, which determines whether an asset qualifies as an investment contract. Under the test, an asset is deemed a security if it involves an investment in an enterprise with a reasonable expectation of profits derived from the efforts of others.
,The SEC concluded that meme coins failed to be offered and sold as part of an investment contract on two key grounds:
,Fraud risks and regulatory oversight
,While the statement clarifies that meme coins do not fall under securities regulations, The SEC warns “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 law”.
,Additionally, the SEC cautioned that the exemption does not apply to crypto assets that falsely label themselves as ‘meme coins’ to evade securities laws. The Division of Corporation Finance will continue to evaluate the economic realities of the particular transaction.
