There's more to SEC's recent Memecoin guidance than eye-catching. On February 27, staff in the SEC's corporate finance division issued memocoin, which is described as a digital asset, “inspired by internet memes, characters, current events, or promoters' tendencies to attract enthusiastic online communities.”
This coincides with the SEC's shift from efforts under previous Chair Gary Gensler and its claim to regulatory power over the digital assets industry in virtually, and could impact an industry that goes far beyond Memocoin.
The SEC's attempts to regulate digital assets during the Biden administration relied largely on the Supreme Court's so-called “howie tests” to determine whether transactions included “investment agreements.” Howey requires money investment in a common company, hoping for benefits from the efforts of others.
In SEC's enforcement action on digital asset exchanges, the defendant argued that he lacked “investment in funds in a common company” that would require reselling the secondary market of digital assets. In the SEC case against Kraken, for example, the agency told federal court that a “pool of resale revenue” by developers “is not necessary under Howey.”
The new SEC guidance confirms the opposite. Memecoin buyers say they will not invest in a common company as they are “not pooled together to be deployed as deployed by promoters or other third parties to develop coins or related companies.” The guidance also explains that Memocoin buyers do not expect any benefits to be gained from the efforts of others. Rather, the value of Memecoin comes from “speculative trading and collective market sentiment that can be collected.”
The SEC's Memecoin guidance is most clearly consequential for the sale and promotion of Memecoin, a subject of recent private class essays raised by individual plaintiffs. However, it has broad implications for all secondary market transactions of digital assets, including exchanges. Similarly, in exchange secondary market transactions, buyer funds are similarly “not pooled to be deployed by promoters or other third parties to develop coins or related companies.” Therefore, the SEC appears to now recognize that under the proper application of the Howey test, these transactions are out of reach of the agency, as they have consistently discussed in previous SEC enforcement cases.
This doctrinal reversal could be part of the driving force behind the SEC's recent decision to voluntarily dismiss some cases, including secondary market transactions, and to maintain other cases.
Indeed, the new SEC guidance includes a statement that “represents the views of (agent) staff.” The SEC also sought to limit guidance to “providing and selling meme coins” under certain circumstances described elsewhere in the release.
Agents can use these boilerplate recitals to try and make them smile from guidance at some point in the future. However, the constitutional principles of due process and fair notifications may constrain the agency's ability to impose retroactive liability on the basis of future flip-flops. Furthermore, while SEC guidance is not binding on the court, a change in the SEC's pooling position makes it difficult for private plaintiffs to assert that most digital assets are sold as securities.
The SEC's guidance on Memecoins is in line with the agency's recent steps to pull the industry back from the regulatory approach that plagued the industry under former chairman Gary Gensler. And this guidance provides welcome clarity from the institution in areas where the agency's advance approach has significantly disrupted the waters. In short, it's an important step in the right direction of US cryptography and policy.
