SEC Clarifies Memecoins Not Securities, Shifts Policy 180%

The recent guidance issued by the staff of the SEC’s Division of Corporate Finance on memecoins has sparked discussions about a potential broader policy shift within the agency. On Feb. 27, the SEC clarified that memecoins, which are digital assets inspired by internet memes, characters, current events, or trends, are generally not considered securities. This clarification is part of a larger trend within the SEC, moving away from the aggressive regulatory stance taken under former Chair Gary Gensler, who sought to assert regulatory control over the entire digital-asset industry.

Ask Aime: What's the history of memecoins and their regulatory status?

The SEC’s approach to regulating digital assets during the Biden Administration has largely relied on the Supreme Court’s “Howey test,” which determines whether a transaction involves an “investment contract.” The Howey test requires an investment of money in a common enterprise, with an expectation of profits from the efforts of others. In recent enforcement actions against digital-asset exchanges, defendants have argued that secondary-market resales of digital assets do not meet the “investment of money in a common enterprise” criterion because investors’ funds are not pooled by developers into a common fund to further a business in which the investors share profits. The SEC, however, has maintained that pooling of resale proceeds by a developer is not required under Howey.

The new guidance from the SEC contradicts this stance. It states that purchasers of memecoins do not invest in a common enterprise because their funds are not pooled together to be deployed by promoters or other third parties for developing the coin or a related enterprise. Additionally, the guidance explains that memecoin purchasers do not expect profits derived from the efforts of others, another key requirement under the Howey test. Instead, the value of memecoins is derived from speculative trading and the collective sentiment of the market, similar to a collectible.

This guidance has significant implications for the sale and promotion of memecoins, which have been the subject of recent private class-actions. However, its broader implications extend to all secondary-market transactions in digital assets, including those on exchanges. In these transactions, purchasers’ funds are likewise not pooled together to be deployed by promoters or other third parties. This suggests that the SEC now recognizes that under a proper application of the Howey test, these transactions are beyond the agency’s regulatory reach, as defendants have consistently argued in prior enforcement cases.

This doctrinal reversal may explain the SEC’s recent decisions to voluntarily dismiss several cases involving