In the roughly two months since the SEC has been under the control of the Trump administration, the agency has largely shut down years of "rulemaking by enforcement" concerning "digital crypto assets." As recently as late 2024, there was a boatload of SEC enforcement actions underway. Since Trump took office, however, most of the notable enforcement actions have been scuttled, including those against Coinbase, Robinhood, Gemini, OpenSea and MetaMask.
Under prior SEC Chair Gary Gensler, not exactly a hero to the crypto industry, the agency was light on policy initiatives and leaned, perhaps to a fault, on case-by-case enforcement. Now, in another sort of reversal, the SEC's Division of Corporation Finance just issued a policy driven "Staff Statement" suggesting that transactions in typical "meme coins" do not involve the offer and sale of securities. Among other problems with this pronouncement, to be discussed forthwith, is the SEC's use of the two-word formulation "meme coin," rather than the much less square, one-word version: "memecoin." I will use memecoin because the two-word version feels to me like writing "rocking" instead of "rockin'" when you are describing music that, in fact, rocks. Also, it's a little bit awkward that President Trump's memecoins have already generated $350 million in profits for the President and his fellow issuers since the Inauguration.
In a forceful dissenting statement, Commissioner Caroline A. Crenshaw argued that the staff's view presents an "incomplete, unsupported view of the law" and risks creating an unwarranted carve-out from SEC jurisdiction for "an entire product category" when a case-by-case determination is required to prevent form from besting substance.
The SEC staff statement characterizes a memecoin as a "crypto asset inspired by internet memes, characters, current events, or trends" where the "promoter seeks to attract an enthusiastic online community" to purchase and trade the coins. Noting that memecoins are typically purchased for entertainment, social interaction, and cultural purposes, the statement posits their value is driven primarily by market demand and speculation, akin to collectibles, and that they often lack inherent use or functionality. Based on this characterization, the staff concludes that transactions in memecoins do not involve the offer and sale of securities.
As with much else involving the legal characterization of digital crypto assets, the discussion leads to the Howey test, established by the Supreme Court in S.E.C. v. Howey Co.Howey, which I like to call the Glengarry Glenn Ross case, involved the offering land in a citrus grove development coupled with a service contract to cultivate that land and remit the net proceeds to investors. The Court held that this scheme constituted an "investment contract" and thus a security under the Securities Act of 1933.
The Howey test defines an "investment contract" as (1) an investment of money (2) in a common enterprise (3) with a reasonable expectation of profits (4) to be derived from the efforts of others. Historically, the SEC generally has considered most cryptocurrencies (excluding bitcoin and perhaps ether) as securities under this test.
But of if promoters' efforts are limited primarily to hyping the memecoin on social media and getting it listed on crypto trading platforms, the SEC argues, there are not likely to be sufficient indicia of purchasers' reasonable expectation of profits based on the promoters' efforts.
Commissioner Crenshaw's dissent sharply critiques this perspective, arguing that the staff's guidance lacks a clear legal definition of a memecoin and that the described characteristics – assets reflective of online trends, speculative value, high volatility – are "near universal hallmarks of crypto assets." Crenshaw emphasizes that the label "meme coin" is largely irrelevant to the core inquiry under the Howey Test, which necessitates an analysis of the "economic realities" of the offer and sale.
Crenshaw directly challenges the staff's assertion that profit expectations are solely driven by market sentiment. She points out that promoters often actively structure offerings and influence demand through mechanisms like supply limitations, buybacks, and promises of managerial efforts such as exchange listings and plans to build "massive ecosystems" of token holders.
Crenshaw cites to cases where a purchasers' ability to resell coins on other exchanges could indicate they are securities and where promises to list tokens on secondary platforms supported profit expectations based on others' efforts. She argues that these promotional activities can create a reasonable expectation of profits derived from the efforts of others. Furthermore, she contends that the linked fortunes of purchasers and promoters, where promoters profit from sales and often retain significant portions of the supply, may itself satisfy Howey's "common enterprise" requirement. This is the Ninth Circuit's concept of "vertical commonality," where the investor's returns are directly tied to the promoter's efforts and success, which supports the idea that a common enterprise does not necessarily require the pooling of investor funds, but can be established by the linked fortunes of investors and promoters.
Another Ninth Circuit interpretation, this one of the "solely from the efforts of others" prong of Howey, further complicates the analysis as to whether a memecoin can be a security. In a case involving a pyramid scheme selling self-improvement courses where investors were rewarded for recruiting others, the court held that the word "solely" should not be read as a strict or literal limitation and instead, the test should be "whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise."
While memecoin purchasers might primarily engage in speculative trading, the active and ongoing efforts of promoters to build community, secure exchange listings, articulate future development plans and implement tokenomics and could be argued to constitute these "undeniably significant" managerial efforts. One example of the "tokenomical" mechanisms used by issuers is "burning," which is a deflationary mechanism in which a small percentage of tokens gets burnt with each transaction, helping to create scarcity and also increase the value of the remaining tokens over a period of time. Another mechanism employs a redistribution system in which a portion of every transaction is shared amongst the existing token holders, which helps foster user engagement and long-term investments.
And this is the fundamental tension: while the SEC staff attempts to provide clarity by addressing a specific type of crypto asset in its nonbinding policy paper, Commissioner Crenshaw pretty convincingly argues that such a generalization bypasses the necessary fact-specific analysis required by established securities law. The Howey test, which is the law of the land in this arena, emphasizes above all else the flexible and adaptable nature of the definition of a security to encompass novel schemes designed to attract investment based on the promise of profits.
Meme Or Scheme: A Re-Oriented SEC Suggests A Quasi-Safe Harbor For Memecoins
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
