Two years ago, we wrote about a cautionary tale in which a New York federal court allowed a complaint alleging that a popular set of NFT basketball cards were “securities” to survive dismissal, rejecting the argument that, even as alleged, these NFTs were merely “collectibles” (with defendants likening them to “Pokémon cards,” “rare coins,” and “fine art”), rather than securities. Just a few months later, two more federal cases addressed the same question and reached different outcomes.
While the question of whether NFTs are “collectibles” or “securities” remains a black box, a different crypto asset—meme coins—recently received some much needed guidance. On February 27, 2025, the SEC’s Division of Corporation Finance staff issued a Staff Statement on Meme Coins (the “Staff Statement”) explaining for the first time that “meme coins,” that is, “a type of crypto asset inspired by internet memes, characters, current events, or trends for which the promoter seeks to attract an enthusiastic online community to purchase the meme coin and engage in its trading,” are “akin to collectibles” and typically not securities. In particular, the Staff Statement applied the U.S. Supreme Court’s 1946 “Howey” test to analyze whether meme coins can be considered an “investment contract,” and explained that they do not. The Howey test requires, among other things, the investment of money in a common enterprise with a reasonable expectation of profits from the work of others. As the Staff Statement explained, meme coins are not making an investment in an enterprise to begin with, let alone one based on the “managerial and entrpreneurial efforts” of others. Rather, “the value of meme coins is derived from speculative trading and the collective sentiment of the market, like a collectible.”
While this guidance is helpful, it should not be read as creating a meme coin free-for-all. Numerous pitfalls still remain to those who would issue meme coins, including:
- Understanding What a “Meme Coin” Is—and Isn’t—Is Key. The Staff Statement takes care to admonish against “meme coins” in name only. Issuers should not attempt to “disguis[e] a product that otherwise would constitute a security” by labeling it a “meme coin.” The SEC staff will look at the “economic realities” of the offering, not what it happens to be titled.
- Fraud is Still Fraud. The Staff Statement also contains a word of caution about general fraud. That an otherwise fraudulent activity is not “securities fraud” does not make it acceptable, and can still become the subject of civil litigation, enforcement activity, or criminal prosecution.
- The SEC is Not the Only Regulator in Town. Even if a meme coin is not regulated as a security, issuers must be cognizant of other applicable laws and regulations. On the federal level, there remains risk of enforcement activity, for example, by the Commodity Futures Trading Commission or the Federal Trade Commission. And if more federal regulators signal an increased friendliness to the crypto industry, state agencies may step in to play a more prominent anti-fraud role. For example, New York’s Department of Financial Services (“DFS”) recently released both a Consumer Alert warning against “exceptional risk of fraud and loss of funds” and a letter to businesses warning that DFS “is closely monitoring the rapid proliferation” of meme coins.
Finally, if Commissioner Caroline Crenshaw’s blistering dissent to the Staff Statement is any indication, the Staff Statement may be the SEC staff’s position now, but that chapter can and will be rewritten in any future change of administration absent more definitive legislation or Supreme Court precedent. In the interim, issuers, purchasers, and other players in the meme coin arena should proceed with caution and be wary both of falling victim to fraud and of landing in the crosshairs of a fraud claim.