SEC’s Stance on Meme Coins Mania and Their Legal Status

When Even Presidents Launch Their Own Crypto

Just as a quick reminder, meme coins are a type of crypto assets that started as a joke or fun idea, often inspired by internet memes, funny trends, or popular online characters. They don’t really have much use or purpose other than for entertainment, community engagement, or speculation. The most famous meme coin is Dogecoin, which started as a joke based on the “Doge” meme with a Shiba Inu dog, but over time, it became widely traded and gained a lot of attention, especially thanks to Elon Musk who publicly supported Dogecoin. 

What is especially interesting is that majority of people investing in meme coins are perfectly aware of the fact that meme coins have no real value and they pretty much invest their money according to the “Theory of greater fool” which basically says that people are investing in something they know is worthless, but they hope that “bigger fool” than themselves will pay more money than they had paid.

So, we can say that it is ok that people gamble with their hard-earned money, but what happens if the US president, the most powerful person on the Earth, issues its own meme coin?! Are the rules of the game different in that case? What is the effect of that action on regular people?

Just 3 days before taking office, Donald Trump, a figure known for his bold moves in both the political and business world, ventured into the crypto world by launching his very own meme coin – Trump coin which has successfully raised 60 billion in the first day. After the temporary hype died down, the market capitalization of the Trump coin dropped to 2 billion market cap making most of the investors bankrupt. This launch sparked a lot of controversy, and it is essential to know about how meme coins are classified in the opinions of the U.S. Securities and Exchange Commission (SEC), considering their unusual nature and also due to their speculative nature.

The SEC Position on Meme Coins

In an effort to determine the legal status of crypto assets, including meme coins, the SEC made a statement providing its views on the issue. According to the views of the SEC, a meme coin is a type of crypto asset that is created with the intent of making profits from internet memes, trends, or cultural trends. These coins are typically designed to attract a wide population of individuals online who constantly buy and trade them. However, even as every meme coin is unique, they all possess certain common features.

SEC reminds that meme coins are typically purchased for entertainment, social engagement, or cultural reasons rather than for practical utility. Their value is driven primarily by market demand and speculation, not by any inherent technological or functional advantage. In this sense, they are similar to collectibles. Moreover, meme coins often experience significant price volatility, further emphasizing their speculative nature.

Not a Security, according to the SEC

The most important aspect of the SEC statement is its interpretation of whether meme coins fall under the federal securities laws. The SEC clarified that, based on the “economic realities” of the coins, meme coins are not securities under U.S. law. That is, trading in meme coins is exempt from the registration requirements of the Securities Act of 1933.

To qualify as a security, the Securities Act and the Securities Exchange Act of 1934 stipulations should be fulfilled. Specifically, such laws categorize securities as devices of finance comprising stocks, bonds, or notes. A meme coin, in the SEC’s assessment, is not these definitions since it doesn’t yield a return, nor does it entitle its holder to rights of future revenues or profits from an enterprise venture. Put simply, meme coins are not run-of-the-mill securities.

The SEC also referred to the “investment contract” test set in the landmark case SEC v. W.J. Howey Co., which aids in determining if a product is a security. The test explores if there exists a reasonable expectation of profits based on others’ work. For meme coins, the SEC emphasized that the coins are not sold in expectation of gain from the labor of a third party or promoter. Meme coin prices are more spurred by speculative trading and investor sentiment rather than when people buy and trade collectibles that do not have legal status as securities.

Potential for Fraud and Legal Enforcement

However, it is important to bear in mind that the SEC’s statement does not give carte blanche approval for all meme coins. While meme coins may not fall under federal securities laws, the SEC also cautioned that any fraudulent activity in their promotion or sale would attract legal consequences. The activity may be enforceable by federal and state regulators under other legislation, which includes fraudulent activity and consumer protection.

Furthermore, the SEC made it explicit that this stance is immediately applicable to those meme coins which fall within the definition. If a coin is marketed or organized in a way as to be inconsistent with these characteristics, or if it is designed to circumvent securities law by masquerading as a non-security, then it can still be an investment contract and subject to regulation.

Donald Trump’s foray into the meme coin space may have caught a few off guard, but it is also a reminder of the broader regulatory landscape for crypto assets. Meme coins, in their typical form, are not considered securities by the SEC, but buyers and promoters should still be cognizant of the potential for legal consequences, especially if fraud is present. As meme coins increase in popularity, direction from regulatory bodies like the SEC will be necessary to determine their role in the future of financial markets.

But even more important than the legal standing of meme coins is the fact that people must understand that meme coins do not have any real value and should be treated more as a type of gamble and entertainment and not as a crypto project with real use cases. I personally hope that damage caused by the meme coins mania will not bring unnecessary damage to legitimate crypto companies.