U.S. SEC Officially Declares Memecoins are not Securities

The United States Securities and Exchange Commission (SEC) has stated that it does not classify memecoins as securities. However, the agency cautioned that fraudulent activities involving these tokens could still face enforcement actions from other regulatory bodies.

The SEC’s announcement followed a report from ABC News about House Democrats’ plans to introduce new legislation. The proposed bill would prohibit public officials, including presidents, from issuing, endorsing, or sponsoring securities, commodities, or digital assets, including memecoins.

SEC Compares Memecoins to Collectibles

On February 27, the SEC’s Division of Corporation Finance clarified that memecoins are more comparable to collectibles than securities under federal law. As a result, individuals engaging in their sale or distribution are not required to register these transactions with the Commission.

Despite this classification, the regulator noted that memecoin buyers and holders would not receive protections under U.S. securities laws. The agency also warned that fraudulent activities related to memecoins could still lead to enforcement or legal action by other federal or state agencies.

Furthermore, the SEC emphasized that its statement does not represent an official rule, regulation, or guidance from the Commission. It also noted that the views expressed carry no legal authority and only serve to explain how federal securities laws apply to crypto assets.

Additionally, the agency pointed out that memecoins generally lack practical utility and are highly volatile. It further explained that memecoins do not meet the legal definition of a security, such as stocks or bonds. They do not provide financial returns or ownership rights to future earnings, profits, or company assets.

Memecoins Fail Howey Test Criteria

Meanwhile, under the Howey Test, which determines what qualifies as an investment contract, a security involves money invested in a common enterprise where profits are expected to come from the efforts of others. The regulator asserted that memecoins do not meet this criterion since they are not tied to an enterprise or designed to generate profits through managerial efforts.

However, the SEC cautioned that its statement applies only to memecoins that align with its outlined description. Any digital asset falsely labeled as a memecoin to evade securities regulations could still fall under securities laws.