SEC Clarifies: Meme Coins Not Securities, Driven by Hype

The U.S. Securities and Exchange Commission (SEC) has clarified its stance on meme coins, stating that they are not considered securities and are more akin to collectibles. In a February 27 staff statement from the Division of Corporation Finance, the SEC explained that most meme coins do not meet the criteria for securities under the Howey test, a legal standard established by the Supreme Court in 1946.

The SEC rationalized its views by noting that meme coins lack key elements of a security, particularly an investment in a common enterprise where profits come from the "entrepreneurial or managerial efforts of others." Instead, the commission views meme coins as driven by "market demand and speculation," with their value tied to hype rather than structured business growth. Unlike traditional investments, meme coins do not grant holders financial rights, such as ownership stakes or dividends.

The SEC's statement highlighted that meme coins typically are purchased for entertainment, social interaction, and cultural purposes, and their value is primarily driven by market demand and speculation. Furthermore, the commission noted that meme coins do not fit within any of the common financial instruments specifically enumerated in the definition of 'ecurity,' such as stocks or bonds. Since their trading activity does not involve an investment in an enterprise, and buyers do not have a "reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others," the SEC concluded that meme coins fail to meet the Howey test's criteria for an investment contract.

The SEC emphasized that its stance does not cover all tokens labeled as meme coins. Any project disguising itself as a meme coin while functioning as a security could still face scrutiny. The commission also clarified that its views are not a "rule, regulation, guidance, or statement" of the commission itself and carry "no legal force or effect." Instead, the regulator aims to provide greater clarity on the application of federal securities laws to crypto assets by clarifying its stance.

Concerns have been raised over the unregulated nature of the meme coin market, with tokens like Official Trump (TRUMP) and Melania Meme (MELANIA) experiencing noticeable price crashes. On the same day as the SEC's statement, House Democrats introduced the Modern Emoluments and Malfeasance Enforcement (MEME) Act, which seeks to block public officials and their kin from issuing, endorsing, or profiting from cryptocurrencies.