Major Win For Memecoins: SEC Affirms They Typically Do Not Qualify As Securities

In a recent statement, the US Securities and Exchange Commission (SEC) provided insights into the classification of memecoins within the context of federal securities laws. 

This move, a part of the SEC’s attempt to make clear how these regulations apply to different assets, could prove to be a significant victory for these altcoins and the exchange-traded funds (ETFs) that have been filed with the regulator.

According to the SEC’s criteria, a memecoin is generally characterized as a type of cryptocurrency that draws inspiration from internet memes, cultural phenomena, or current events, with promoters aiming to cultivate a vibrant online community that engages in buying and trading these assets.

The SEC’s Division of Corporation Finance delineated that while individual memecoins may exhibit distinct features, they typically share common traits. Their value largely hinges on market demand and speculative trading, akin to collectibles rather than traditional investments. 

As such, the agency asserted that memecoins usually lack substantial functionality or practical use beyond entertainment, leading to significant price volatility driven by speculative behavior.

Importantly, the SEC concluded that transactions involving these types of memecoins do not constitute the offer and sale of securities as defined under the federal securities laws. 

This means that individuals participating in the sale of meme coins are not required to register their transactions under the Securities Act of 1933, nor do they need to rely on any exemptions from registration. 

The SEC’s analysis draws from the definitions of “security” enshrined in federal statutes, which include various financial instruments such as stocks and bonds. Since memecoins do not yield income or confer rights to profits or assets, they do not fit into these established categories. 

The SEC evaluated whether memecoins could be classified as investment contracts under the “Howey test,” a legal precedent that determines if an arrangement qualifies as a security based on economic realities.

The key factors examined include whether there is an investment in an enterprise with the expectation of profits derived from the efforts of others.

The SEC found that purchasers of memecoins are not investing in an enterprise, as their funds are not pooled for development by promoters. Instead, the value of memecoins emerges from speculative trading and public sentiment, without any involvement of managerial efforts that could generate profits. 

However, the statement made clear that this classification does not apply universally to all memecoins. The SEC will scrutinize any offerings that deviate from the outlined characteristics or that attempt to bypass securities laws under the guise of being meme coins. 

Plus, the regulator clarified that while memecoins may not be subject to federal securities regulations, any fraudulent activities associated with their sale could still be pursued under other federal or state laws.

Featured image from DALL-E, chart from TradingView.com