After years of refusing to give clear answers1 on the issue of which tokens are securities, the SEC has finally provided some clarity, at least with respect to meme coins: they are not securities. Well, actually, not quite; the release “Staff Statement on Meme Coins” is a statement representing the views of the staff of the Division of Corporation Finance and “has no legal force or effect.”2 Nevertheless, the Staff Statement is a refreshing bit of clarity from a regulator that has refused to give much guidance on the subject of tokens and crypto assets previously.3
The upshot: meme coins are not securities because they “typically are purchased for entertainment, social interaction, and cultural purposes, and their value is driven primarily by market demand and speculation.” They do not share characteristics with any of the common financial instruments specifically enumerated in the definition of “security” because, among other things, they do not generate a yield or convey rights to future income, profits, or assets of a business. They also are not investment contracts because they do not involve an investment in an enterprise nor are meme coins purchased “with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”
In essence, meme coins are the equivalent of digital beanie babies or tulip bulbs.4
Legal Tokens
In the words of one of my colleagues, the Staff Statement pretty much just recites black letter law and may be as unexciting, from a legal analysis standpoint, as the “TurnKey Jet” no action letter.4 Still, one of the nagging issues for meme coins was whether there was an investment contract issue lurking; and in that respect, the Staff Statement does contain one very useful nugget, not just for meme coins but other crypto assets (as usual, hidden away in a footnote): “For example, if the promoters’ efforts are limited primarily to hyping the meme coin on social media and online forums and getting the coin listed on crypto trading platforms, then there are not likely to be sufficient indicia to establish that purchasers had a reasonable expectation of profits based on the efforts of the promoters.” Hurray for clarity!
Sort of. When is a meme coin not just a meme coin? At least under the standard set by the Statement? As pointed out by the response issued by Commissioner Crenshaw, the answer seems to be, you know, when it meets the elements of the Howey test. Which kind of brings us full circle.
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1 Saying that “the law is clear, you just need to apply it” is not what we mean by “clear answer.”
2 Here is the exact language contained in the statement: “This statement represents the views of the staff of the Division of Corporation Finance (the “Division”). The statement is not a rule, regulation, guidance, or statement of the U.S. Securities and Exchange Commission (“Commission”), and the Commission has neither approved nor disapproved its content. This statement, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.”
3 The fact that both the person who recently became President of the United States and his wife have been closely associated with meme coins bearing their respective names may be purely coincidental with suddenly receiving a statement about meme coins not being securities.
4 “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.”
5 The fact pattern of that letter was so bland from a securities law perspective that it prompted Commissioner Peirce to state “This transaction is so clearly not an offer of securities that I worry the staff’s issuance of a digital token no-action letter—the first and so far only such letter—may in fact have the effect of broadening the perceived reach of our securities laws.”
