SEC’s Memecoin Guidance: A Plot Twist in Crypto Law?

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Behold, dear reader, a tale of intrigue and bureaucratic machinations, woven by none other than the esteemed Securities and Exchange Commission (SEC)! 🎭

On a fateful day, the 27th of February, the SEC’s Division of Corporate Finance issued a missive, casting light upon the mysterious realm of memecoins. These digital assets, born of internet memes, characters, and trends, have captured the hearts of an ardent online community. Yet, the SEC’s proclamation reveals that memecoins shall not be deemed securities. 🙅‍♂️

A shift in the winds of regulation, one might say, as the SEC distances itself from the ambitious endeavors of former Chair Gary Gensler, who sought to assert dominion over the vast expanse of the digital-asset industry. This guidance, however, portends a broader revolution, extending far beyond the confines of memecoins. 🌪️

Under the Biden Administration, the SEC’s efforts to govern digital assets hinged upon the venerable “Howey test,” a legal criterion for identifying an “investment contract.” This test necessitates an investment of money in a common enterprise, with the anticipation of profits from the labors of others. 💰

In the SEC’s crusade against digital-asset exchanges, the accused contended that secondary-market resales of digital assets lacked the requisite “investment of money in a common enterprise,” for the investors’ funds were not amalgamated by developers into a shared fund, nor were they employed to foster a business in which the investors would partake in the spoils. 🤝

In the SEC’s skirmish with Kraken, the agency informed the tribunal that the “pooling of resale proceeds” by a developer was not a prerequisite under Howey. Yet, the SEC’s latest guidance contradicts this stance, asserting that memecoin purchasers contribute no funds to a common enterprise, as their monies are not consolidated for the development of the coin or a related endeavor. 🔄

Moreover, the guidance elucidates that memecoin purchasers do not anticipate profits derived from the exertions of others, a crucial element of the Howey test. Instead, the value of memecoins stems from speculative trading and the collective sentiment of the market, akin to a cherished collectible. 📈

The implications of the SEC’s memecoin guidance extend beyond the sale and promotion of these whimsical tokens, impacting all secondary-market transactions in digital assets, including those conducted on exchanges. In such transactions, the purchasers’ funds are similarly not pooled for the coin’s development or a related enterprise. Hence, the SEC appears to acknowledge that, when applying the Howey test correctly, these transactions fall outside its jurisdiction, a contention repeatedly advanced by defendants in previous SEC enforcement cases. 🎯

This doctrinal volte-face may well have spurred the SEC’s recent decisions to voluntarily dismiss several cases concerning secondary-market transactions and to suspend further proceedings in others. 🗑️

However, let us not be too hasty in our jubilation. The SEC’s guidance bears the disclaimer that it represents the views of the agency’s staff, not necessarily the SEC itself, and carries no legal weight. The SEC may attempt to extricate itself from this guidance in the future, but constitutional principles of due process and fair notice may limit the agency’s capacity to impose retroactive liability based on any subsequent reversal. Furthermore, while the SEC’s guidance is not legally binding on courts, the agency’s change in position on pooling will complicate private plaintiffs’ arguments that most digital assets are sold as securities. 🚫

The SEC’s guidance on memecoins aligns with the agency’s recent measures to retreat from the regulation-by-enforcement approach that plagued the industry under the reign of former Chair Gary Gensler. It offers much-needed clarity in an area where the SEC’s prior stance had left many scratching their heads. In essence, it is a significant stride toward a more coherent crypto legal landscape in the United States. 🌟

Note: The views expressed herein are solely those of the author and do not necessarily reflect the opinions of CoinDesk, Inc., or its proprietors and affiliates.

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2025-03-11 00:33