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Are Memecoins Securities?

On Behalf of | Jun 21, 2024 | Blockchain

Memecoins, such as Dogecoin, Shiba Inu, and PEPE, have surged in popularity, catching the interest of casual investors and aligning themselves with internet culture. These memecoins, often started as jokes or parodies of established cryptocurrencies like Bitcoin and Ethereum, rely heavily on market demand and speculative trading rather than intrinsic value or utility. Unlike conventional financial assets, their value can be highly volatile and driven by the collective sentiment of retail investors. Despite this, they don’t meet the criteria for being classified as securities under U.S. federal law.

The U.S. Securities and Exchange Commission (SEC) defines a security in broad terms, including stock, bonds, and investment contracts. Intuitively, memecoins don’t seem to fit into these categories. They’re not equity securities because they don’t represent ownership in a company or entitlement to profits. Similarly, they are not debt securities as they do not promise any yield. Moreover, memecoins are not transferable shares linked to any corporate governance rights. Essentially, they lack the characteristics that traditionally define securities.

A key element in considering whether an asset qualifies as an investment contract under U.S. law is the Howey Test, established by the Supreme Court. This test identifies an investment contract as an investment of money in a common venture with the expectation of profit largely from the efforts of others. Memecoins don’t typically offer any guaranteed returns or promises of future profits. Their worth is driven by speculative trading activities and public sentiment rather than any promise from developers or promoters of financial gains.

In addition, memecoin management and governance are typically community-driven without overreach by early investors or promoters, and therefore it becomes harder to argue that any profit or utility derived is due to the efforts of others.

Legal Tips for Launching a New Memecoin

For those looking to launch a new memecoin and avoid having it characterized as an investment contract and thus a security, consider these legal tips:

1. Clear Disclaimers:

o Clearly state in all materials that the memecoin is not expected to provide profits or financial returns.

o Include explicit warnings that investors may lose all their money.

2. No Promises of Future Value:

o Avoid any language that implies or guarantees future value or profit from the coin.

o Make it clear that the token is primarily for entertainment or utility within a specific ecosystem.

3. Decentralized Governance:

o Structure the governance of the memecoin in a decentralized manner through a DAO.

o Ensure that no single entity, including promoters and early investors, holds significant control (no more than 20%) over decision-making processes.

4. Avoid Marketing as an Investment:

o Do not advertise or market the memecoin as an investment opportunity.

o Emphasize its community-driven nature and utility aspect without suggesting financial gains.

5. Transparent Communication:

o Maintain transparency with holders about the team’s intentions and the nature of the memecoin.

o Regularly update the community to build trust and maintain clear expectations.

There’s a significant debate over the correct approach to classifying memecoins. The industry advocates for clear, rational regulatory guidelines per existing U.S. federal laws to avoid memecoins being misclassified as securities unfairly. As long as marketplace expectations, investor information, and promotional conduct are managed correctly, these tokens should remain outside the security purview.

By following these guidelines, memecoin creators can better navigate the regulatory landscape and reduce the risk of their token being classified as a security, ensuring compliance and fostering a transparent relationship with their community.

To address any specific concerns or questions related to memecoin, we recommend reaching out to Cea Legal P.C.. Our expertise can provide tailored advice and guidance, offering valuable insights to navigate the complexities of Blockchain Law and safeguard your company’s interests.