In a recent development, the SEC has issued new guidance regarding memecoins, a type of digital asset inspired by internet memes and trends. The implications of this guidance are far-reaching and could signal a shift in the agency’s regulatory approach to cryptocurrencies.
The guidance, released on Feb. 27 by the SEC’s Division of Corporate Finance, clarifies that memecoins are generally not considered securities. This is a departure from the SEC’s previous efforts to regulate the entire digital asset industry under former Chair Gary Gensler. The guidance sheds light on the agency’s interpretation of the “Howey Test,” a key factor in determining whether a transaction involves an “investment contract.”
According to the Howey Test, an investment of money in a common enterprise with an expectation of profits from the efforts of others is essential for classifying a transaction as an investment contract. The SEC’s enforcement actions against digital asset exchanges have often revolved around this criterion. However, the recent guidance challenges this interpretation, stating that purchasers of memecoins do not invest in a common enterprise and do not expect profits derived from the efforts of others.
This clarification has significant implications not only for memecoins but also for secondary-market transactions in digital assets, including those on exchanges. The guidance suggests that under a proper application of the Howey Test, these transactions may fall outside the SEC’s regulatory purview. This doctrinal shift could explain the agency’s decisions to dismiss several cases involving secondary-market transactions and stay further proceedings in others.
While the SEC’s new guidance is attributed to the agency’s staff and not necessarily the SEC itself, it provides much-needed clarity on the treatment of memecoins and other digital assets. This move aligns with the SEC’s recent efforts to move away from a regulation-by-enforcement approach, offering a more transparent regulatory environment for the crypto industry.
Jason Mendro, a partner at Gibson Dunn’s Securities Litigation Practice in Washington D.C., emphasized the importance of the SEC’s guidance in providing clear direction for the industry. Matt Gregory, another partner at the firm, echoed this sentiment, highlighting the impact of the guidance on regulatory clarity. Nick Harper, also a partner at Gibson Dunn, noted that the guidance represents a significant step in the right direction for crypto law and policy in the United States.
In conclusion, the SEC’s recent guidance on memecoins marks a pivotal moment in the regulatory landscape for digital assets. By providing clarity on the treatment of memecoins and secondary-market transactions, the agency is taking steps to create a more predictable and stable environment for the industry. This development underscores the evolving nature of cryptocurrency regulation and sets the stage for future discussions on the intersection of digital assets and securities law.
