SEC’s Memecoin Guidance: Implications Beyond Memecoins

On February 27, the SEC’s Division of Corporate Finance issued new guidance on memecoins, defining them as digital assets often inspired by internet memes or current trends. The guidance notes that memecoins are generally not sold as securities.

This marks a shift from former Chair Gary Gensler’s approach, which sought broader regulatory power over the digital asset industry. The SEC’s regulation efforts have relied heavily on the Supreme Court’s Definition through the Howey test, which determines whether a transaction constitutes an investment contract requiring specific conditions to be met.

In cases against digital asset exchanges, defendants claimed that secondary-market resales do not involve the pooling of investor funds in a common enterprise. In the SEC’s case against Kraken, it stated that this pooling requirement was not necessary under Howey.

The new guidance emphasizes that memecoin buyers do not invest in a common enterprise, as their funds are not pooled or used by developers. Instead, it highlights that memecoins derive their value from speculative trading and market sentiment, much like collectibles.

While the guidance directly affects memecoin sales, it also has broader ramifications for all secondary-market digital asset transactions, potentially beyond the SEC’s reach as defendants had argued.

This change may explain the SEC’s recent dismissal of cases involving secondary-market transactions. However, it’s important to note that this guidance represents the views of agency staff rather than the SEC itself and carries no legal force. The SEC aims to limit this guidance strictly to memecoins, which may allow for future reinterpretation.

Although the SEC’s statements may not create binding legal obligations, they imply that a shift in understanding pooling has taken place, impacting arguments in most digital asset sales. Overall, the SEC’s clarity provides a more favorable perspective for crypto law and policy in the U.S., marking a significant transition from the previous enforcement-centric approach under Gensler.