On February 27, 2025, the Securities Exchange Commission’s (“SEC”) Division of Corporation Finance provided its views on “meme coins” pursuant to a Staff statement (the “Statement”). Using the below definition of “meme coin”, the SEC concluded that a “meme coin” does not constitute a security under the Howey Test, and that buyers and sellers of such meme coins are not protected by U.S. securities laws. This is a significant departure from the SEC’s enforcement efforts during the Biden administration where it took a broader view of the Howey Test and its applicability to meme coins. It is important to note that staff statements are not rules, regulation or guidance and have no legal force or effect. However, they are valuable in helping inform the public on SEC enforcement policy.
The Statement starts by defining what the staff views as a “meme coin”. It explains that a “meme coin” “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. Although individual meme coins may have unique features, meme coins typically share certain characteristics. Meme coins typically are purchased for entertainment, social interaction, and cultural purposes, and their value is driven primarily by market demand and speculation. In this regard, meme coins are akin to collectibles. Meme coins also typically have limited or no use or functionality. Given the speculative nature of meme coins, 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”.
The Statement then turns to analyzing whether such a “meme coin” is an “investment contract” under the Howey Test, and therefore, a security for purposes of U.S. securities laws. The analysis focuses on the Howey Test requirement that in order to qualify as an “investment contract”, the economic realities of the transaction must be premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. According to the Statement, there are three reasons this factor of the test is not satisfied in a meme coin offer and sale transaction. First, the meme coin purchasers are not making an investment in an enterprise because their funds are not pooled together to be deployed by promotors or third parties. Second, any expectation of profits that meme coin purchasers have is not derived from others, but from the speculative trading and collective sentiment of the market. Third, the promotors of meme coins are not undertaking managerial or entrepreneurial efforts from which purchasers could reasonably expect a profit.
While this is a significant departure from the SEC’s enforcement position in cases such as SEC v. Coinbase, the Statement cautions that the above guidance does not apply to meme coins that are inconsistent with the description of “meme coin” set forth in the Statement and attempts to circumvent the securities laws by labeling a security as a “meme coin” will be prosecuted. In addition, even if a meme coin does not satisfy the Howey Test and, thus, does not enjoy the protection of the U.S. securities laws, a buyer of such a meme coin could still seek to recover damages under common law theories, such as fraud and breach of contract.
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Sadis has an experienced group of lawyers who have litigated numerous crypto asset cases and handled SEC crypto related investigations and enforcement. Please reach out to the practice contacts below should you have questions. Douglas Hirsch (dhirsch@sadis.com), Sam Lieberman (slieberman@sadis.com), James Ancone (jancone@sadis.com) and Frank Restagno (frestagno@sadis.com).
