The recent guidance issued by the SEC regarding memecoins could signal a significant shift in regulatory approach. On February 27, the SEC’s Division of Corporate Finance clarified that memecoins—defined as digital assets derived from internet memes, characters, or current trends that aim to foster an enthusiastic online community—are typically not considered securities. This guidance reflects a move away from the aggressive regulatory strategies employed during former Chair Gary Gensler’s tenure and may have far-reaching consequences beyond just memecoins.
Historically, the SEC has relied heavily on the Howey Test to determine whether a transaction constitutes an “investment contract.” This test requires that an investment of money is made in a common enterprise with an expectation of profits primarily from the efforts of others. In prior enforcement actions against digital asset exchanges, defendants contended that secondary-market sales of digital assets do not meet this criterion, arguing that funds involved in resale transactions are not “pooled” together under developers’ control to generate shared profits.
The SEC’s new memecoin guidance contradicts previous assertions by the agency. It states that buyers of memecoins are not investing in a common enterprise because their funds are not aggregated to fund the development of the coin or any related activities. Additionally, memecoin purchasers do not anticipate profits from the efforts of others; rather, their value is driven by speculative trading and collective market sentiment, similar to collectibles.
This guidance is particularly crucial for the sale and promotion of memecoins, as it comes amidst ongoing private class-action lawsuits by individual plaintiffs. However, the implications stretch to all secondary-market transactions involving digital assets on exchanges. These transactions also do not involve pooled investments for further development, indicating that the SEC now acknowledges these transactions may fall outside of its jurisdiction.
The SEC’s doctrinal shift might explain its recent decision to voluntarily dismiss multiple cases related to secondary-market transactions and to pause additional proceedings. While the SEC states that this guidance represents the views of staff rather than the overarching stance of the commission, it nonetheless signals a critical re-evaluation of its enforcement strategies.
The SEC’s latest guidance marks a departure from its earlier regulation-by-enforcement approach, which has been a source of confusion within the crypto industry. This move is seen as a positive step towards greater clarity in cryptocurrency law and regulation in the United States.
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