The SEC Leaves Meme Coin Investors to Fend for Themselves
By Benjamin Schiffrin, Director of Securities Policy
After the inauguration of President Trump and the installation of new acting leadership at the SEC, the SEC issued guidance from its staff purporting to declare that transactions in “meme coins” generally do not involve the offer or sale of securities. To be sure, the guidance said the inquiry is fact specific, which suggests that the securities laws could still apply to anyone buying or selling meme coins. But the staff described meme coins generally and expressed its view that transactions in the types of meme coins described in the guidance do not involve the offer or sale of securities. Instead, the staff said meme coins are akin to “collectibles.” This would probably surprise meme coin investors.
Meme coins are a type of crypto asset inspired by a celebrity or internet trend. Most involve a silly name and hyped-up narrative, yet they still manage to attract billions of dollars from speculative traders. That’s because retail investors see the hype and have a fear of missing out (FOMO) on an opportunity to make money. Usually, however, retail investors who buy meme coins only suffer losses. Given the risks, it’s astounding the SEC would declare that neither meme coin purchasers nor holders are protected by the federal securities laws.
It's all the more troubling given that President Trump launched his own meme coin shortly before his inauguration. Although the price initially surged to $75, it plummeted thereafter, leaving investors with more than $2 billion in losses. According to an analysis, over 800,000 crypto wallets, many of them with small holdings, lost money on the token.
The way in which retail investors often lose money in meme coins reveals the problem with the SEC seeming to categorically exclude them from the definition of a security. Developers of the token and other insiders usually hold a large share of the total supply; once enough investors buy in, the insiders cash out, causing the price to fall precipitously:
The cycle of speculation has remained consistent: a meme coin goes viral, early adopters and insiders profit from the hype, and latecomers are often left holding worthless tokens after the inevitable crash.
In the world of crypto, this is called a rug pull. But it’s akin to a pump and dump scheme in traditional securities. In those schemes, insiders hype a stock to create a buying frenzy that pumps up its price, and then those same insiders dump their shares of the stock by selling at the inflated price. This typically causes the stock price to drop precipitously, causing the non-insider investors to lose money. For the securities laws to protect investors who suffer losses in these pump and dump schemes but not investors in remarkably similar crypto rug pulls makes no sense.
On the contrary, when investors suffer losses of $250 million, the securities laws should protect them regardless of whether the scheme involves stocks or meme coins. That’s what happened after the president of Argentina promoted a coin called $Libra by posting that the “world wants to invest in Argentina” and directing his followers to a site where they could buy the token. Over the next few hours, thousands of people invested, and $Libra’s value skyrocketed. Then, the people behind $Libra, who controlled 80% of the coins, cashed out for at least $90 million. This caused the price to collapse, which left retail investors with losses of $250 million. It seems unlikely these investors thought they were buying “collectibles.”
Make sure to check out Dennis Kelleher’s op-ed in The Hill about the importance of bipartisan commissions at independent agencies.
Investors in the meme coin promoted by Hailey Welch, better known as “Hawk Tuah Girl,” probably also did not think they were buying collectibles. Welch rose to fame through a viral Tik Tok video, and after capitalizing on her newfound fame through merchandise sales and a podcast, she launched a meme coin, which was promoted with promises that it would “redefine the crypto space.” The token’s price rose quickly after its launch but then plummeted by 95%; investors lost millions.
Unsurprisingly, the crash was caused by insiders who controlled 90% of the tokens and sold them at their peak. Analysts suggested that the token launch involved coordinated efforts to maximize insider profits at the expense of public investors. Some of those investors lost their life savings. They have since filed complaints with the SEC alleging that the launch was a pump and dump. It’s understandable that investors would think the SEC would regulate these types of offerings, but the SEC’s meme coin guidance indicates that the investors will be left to fend for themselves.
These examples show why meme coins are often considered nothing more than digital Ponzi schemes that exist to enrich insiders at the expense of retail investors. The SEC has long protected retail investors from traditional Ponzi schemes. Its refusal to protect investors so long as fraudsters perpetrate their schemes using meme coins is shocking.
The SEC’s guidance on meme coins is especially shocking because the staff admits that meme coins are speculative, experience significant market price volatility, and are often accompanied by statements regarding their risks. These characteristics make meme coins sound less like “collectibles” such as artwork, stamps, or baseball cards and more like penny stocks. Like meme coins, penny stocks are speculative, high-risk investments that experience high volatility. Also like meme coins, they are frequently the subject of fraudulent schemes. The SEC regulates penny stocks but has now said the entire category of meme coins is generally outside its purview. Not only does this leave meme coins as entirely unregulated, despite their obvious risks to retail investors, but it will encourage the financial industry to create similar products that they can claim should be similarly unregulated. An agency whose mission is to protect investors should and must do better.