SEC says ‘meme’ coins aren’t securities

Meme coins have also frequently been used as conduits for crypto sector scams, known as “rug pulls,” which are similar to “pump and dump” securities scams — insiders drive up of the value of the asset with hype and sell into the inflated market, before prices crash, leaving late-arriving traders with hefty losses.

On Thursday, the SEC declared that these cryptoassets typically don’t meet the definition of securities, and therefore aren’t subject to securities laws, or basic investor protections, and don’t need to be registered.

It also said that the offering and sale of meme coins don’t meet the test to be defined as “investment contracts” — which are subject to securities regulation — as the “sale of meme coins does not involve an investment in an enterprise nor is it undertaken with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”

In its statement, the regulator said that meme coins are more like collectibles than investments, given that they have no use or function, other than entertainment, and their value is entirely driven by speculation.

While meme coins don’t fall under federal securities law, according to the SEC’s corporate finance division, the SEC noted that, “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 regulator’s position on meme coins comes in the wake of its new mandate to develop a regulatory framework for the crypto sector, and the new U.S. administration’s pro-crypto stance.

Indeed, in the days leading up to his second inauguration on Jan. 20, both U.S. president Donald Trump and his wife, Melania, launched meme coins.

According to data from CoinMarketCap, the Trump meme coin traded up to US$74 per coin immediately after its release, and has since lost much of that value. It now trades at about US$12.50 per coin. Similarly, the Melania meme coin peaked at US$13.69 and now trades at about US85¢.

Alongside today’s statement on the regulatory status of meme coins, the SEC also formally announced that it has withdrawn a pending enforcement action against crypto platform, Coinbase Inc., citing its ongoing work to craft new crypto regulation.

“For the last several years, the commission’s views on crypto have been largely expressed through enforcement actions without engaging the general public. It’s time for the commission to rectify its approach and develop crypto policy in a more transparent manner,” said Mark Uyeda, acting chairman of the SEC, in a release.

The regulator said that the dismissal of the case against Coinbase “will facilitate the commission’s ongoing efforts to reform and renew its regulatory approach to the crypto industry, not on any assessment of the merits of the claims alleged in the action.”

Coinbase announced the SEC dismissal in a blog post earlier, saying that the decision, “confirms that this case should never have been filed in the first place.”

“In its war against crypto [the SEC] acted as if it was above the law, usurping the power of Congress as set forth in the Constitution. And after millions in legal costs and fees, countless employee hours, and years of protracted litigation, we have successfully protected our customers’ rights, and held the SEC accountable,” it said.