Response to Staff Statement on Meme Coins: What Does it Meme?

[1] The purpose of written guidance from SEC staff is to promote understanding of, and compliance with, the federal securities laws.[2] Today’s guidance from the Division of Corporation Finance turns that concept on its head. It advances an incomplete, unsupported view of the law to suggest that an entire product category is outside the bounds of SEC jurisdiction.[3]

And exactly what is a meme coin, the category to which this guidance is directed? Other than how a promoter chooses to label it, what basis do we have to determine whether something is a meme coin? The guidance offers no clear definition from law or even a basic dictionary. It generally describes a meme coin as an asset reflective of online or social trends, of speculative value, that tends to experience high volatility. But these are near universal hallmarks of crypto assets. The lack of a useful definition alone makes the value of this guidance questionable, except perhaps as a roadmap for crypto enterprises looking to evade oversight by labeling themselves as a meme coin.

Whatever one might understand a meme coin to be, the label is largely irrelevant to whether something is offered and sold as a “security” under the SEC’s remit. Throughout the federal securities laws, Congress defined a “security” to include an “investment contract,” a term that “embodies a flexible rather than a static principle,” and “is capable of adaptation to meet [ ] countless and variable schemes.”[4] The Supreme Court established the Howey test nearly 80 years ago to determine whether something is an investment contract. The crux of Howey is the reasonable expectation of profits based on the efforts of others.[5] But rather than analyze the reasonable expectations of meme coin purchasers, today’s guidance suggests promoters can get around Howey with disclaimers or other window dressing designed to downplay the significance of managerial efforts.

Decades of controlling authority does not permit such easy avoidance of the federal securities laws.[6] Howey demands a facts and circumstances analysis of the “economic realities” of an offer or sale. Today’s statement paints meme coins as cultural projects whose purpose is entertainment and social engagement. The reality is that meme coins, like any financial product, are issued to make money. Promoters make money from selling the coin, and often also from retaining and holding a significant portion of the token supply as its value increases. The linked fortunes of purchasers and promoters – who will both make money as the coin value goes up – may itself satisfy Howey’s requirement of a “common enterprise.”[7]

Separately, this guidance further posits that meme coin purchasers’ expectations of profits are not based on the efforts of others, because the coin’s value is derived from “speculative trading and the collective sentiment of the market.” But the reality is that trading and demand for meme coins do not exist in a vacuum. Promoters commonly structure offerings and impact market demand over time by limiting supply or ensuring scarcity through buybacks, "burning," or similar activities.[8] Fraudulent schemes to manipulate demand through pump-and-dumps or rug pulls are not uncommon.[9] Many promoters also sell meme coins based on express promises of what courts have described as managerial efforts, such as getting a coin listed on crypto exchanges.[10] Other meme coins attract purchasers with promises of a “long-term vision that extends far beyond the hype,” including things like a “massive ecosystem,” technology improvements, or AI elements, just to name a few.[11]

Among the hundreds of self-proclaimed meme coins in the market, there is no doubt a continuum of offers and sales, some of which may be offers and sales of securities and some of which may not. But it seems far from clear that sophisticated efforts such as those described above, which may give rise to reasonable expectations of profits, are outside the norm. One wonders how many such coins were examined in order to draft the generalized descriptions of meme coins set out in the guidance.

Regardless, the individualized inquiry Howey requires simply cannot be reconciled with the staff’s conclusion that offers and sales of a vaguely defined category, consisting of hundreds of unique crypto assets, are generally not securities. This guidance is not a reasoned interpretation of existing law. It raises more questions than it answers about what a meme coin is and whether that is a definable or useful categorization for purposes of the existing securities laws. It boils down to a broad statement of general principles that provide little clarity or predictability as to any given coin.