The United States Securities and Exchange Commission (SEC) has revealed that meme coins are not securities. According to the agency, the tokens lack any real-world backing, yield, or function. In the decision made by the Corporation Finance Division, the tokens are not mandated to be registered under federal securities law.
According to the agency, meme coins are like collectibles, which are bought for entertainment and social interaction. It also mentioned that their values are determined by market perception, noting that the feature makes the assets speculative.
In its statement, the agency mentioned that since the assets are not subjected to federal laws, anybody trading them is doing so at their risk. “As such, persons who participate in the offer and sale of meme coins do not need to register their transactions with the Commission under the Securities Act of 1933 (“Securities Act”) or fall within one of the Securities Act’s exemptions from registration. Accordingly, neither meme coin purchasers nor holders are protected by the federal securities laws,” the SEC said.
Meme coins fail to pass the Howey Test
The SEC determines if an asset should be classified as securities by administering the Howey Test from the SEC vs. W.J. Howey Co. case. The test centers around a transaction involving money under the premise that profits are achieved from the efforts of others. The SEC has noted that meme coins do not fit this description for two reasons.
The first, according to the agency, is that buyers are not investing in a common firm where their funds are managed by a single entity. Secondly, the SEC mentioned that the profits generated are speculative and not generated through the efforts of the management team. The agency mentioned that meme coins developers are not assuming managerial roles that will impact the prices of these tokens.
In addition, the SEC mentioned Sections 2(a)(1) of the Securities Act and 3(a)(10) of the Securities Exchange Act of 1934, which detail the term security and list different types including stocks, notes, and bonds.
“In other words, a meme coin is not itself a security. The aforementioned statutory sections also provide that “investment contracts” are securities. Given that a meme coin is not itself a security, we conduct our analysis of whether a meme coin may be offered and sold as part of an investment contract under the “investment contract” test outlined in SEC v. W.J. Howey Co,” the SEC said.
Since the SEC does not recognize meme coins as securities, they cannot be covered under federal securities law. This means that anybody who trades or purchases them does so at their own risk. However, the SEC mentioned that the verdict doesn’t mean that bad actors can continue to operate.
The agency mentioned that people who carry out illegal activities will still be sanctioned accordingly under the law. “Fraudulent conduct related to the offer and sale of meme coins may be subject to enforcement action or prosecution by other federal or state agencies under other federal and state laws,” the SEC said.