SEC Clarifies: Memecoins Not Securities, Fraud Still Prohibited

The U.S. Securities and Exchange Commission (SEC) has clarified its stance on memecoins, stating that these digital assets do not fall under the category of securities. However, the agency has warned that any fraudulent activities involving memecoins may still be subject to enforcement actions by other regulatory bodies.

The SEC's Division of Corporation Finance, in a statement released on Feb. 27, explained that memecoins are akin to collectibles and do not involve the offer and sale of securities under federal securities laws. As such, persons involved in the offer and sale of memecoins are not required to register their transactions with the Commission. The agency also noted that memecoin buyers and holders would not be protected by U.S. securities laws.

The SEC's statement comes amidst a broader effort to provide greater clarity on the application of federal securities laws to crypto assets. The agency has been working to create a framework for digital assets, including memecoins, which have gained significant attention in recent months.

In its statement, the SEC highlighted that memecoins typically have limited or no use or functionality and tend to experience significant market price volatility. The agency also noted that memecoins do not fit with any of the common financial instruments specifically enumerated in the definition of 'ecurity,' such as stocks or bonds, as they do not give a yield or rights to future income, profits, or assets of a business.

The SEC further explained that a memecoin does not fit under the definition of an 'investment contract' under the securities-defining Howey test. The agency stated that the offer and sale of memecoins does not involve an investment in an enterprise nor is it undertaken with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. In other words, a memecoin is not itself a security.

The SEC's statement also addressed the possibility of memecoins being used to hide from securities laws by disguising a product that otherwise would constitute a security. The agency noted that it would evaluate the economic realities of the particular transaction in such cases.

SEC Commissioner Hester Peirce, who is leading the agency's Crypto Task Force, has previously stated that many memecoins "probably do not have a home in the SEC under our current set of regulations." The agency's latest statement aligns with this sentiment, providing further clarity on the regulatory landscape for memecoins.