The emergence of some new coins known as meme coins in the world of cryptocurrencies has been a key focus of attention in general discussions, including concerning their classification by regulatory authorities. There has been a significant amount of discussion to whether or not meme coins are securities. This is especially the case in investors, developers and regulators since the status of an asset as a security entails profound legal, tax, and regulatory implications.

This paper endeavors to examine the nature of factors governing the decision to identify meme coins as securities, laws governing digital currencies, and the implications of recognition of meme coins.

What Are Meme Coins?

Meme coins are tokens that are associated with internet culture, memes and ramping based on their pumps. Some of the most famous meme coins include:

• Dogecoin (DOGE): It started as a meme created by one Jackson Palmer as a joke and has garnered a lot of followers and is today the first meme coin almost everyone knows.
• Shiba Inu (SHIB): Soha has described Shiba Inu as a ‘Dogecoin killer’ and it has grown into a complete set of features including decentralized exchanges and staking protocols.
• Floki Inu (FLOKI): As enthusiasts name the SHIB token after Musk’s pet dog, Floki Inu has intertwined meme craze with the prospect of incorporating gaming and decentralized finance.
• Despite these coins often being created as jokes or for fun, they have gained substantial investors’ following which begs the question of whether meme coins ought to be governed like actual financial securities – stocks or bonds.

What Are Securities?

A security is an article that has value and is flexible and can be bought and sold. In the context of U.S law, securities are usually defined under the securities act of 1933 as well as the securities exchange act of 1934 by the securities and exchange commission SEC.. These laws just aim at giving protection to investors from being defrauded and or manipulated through regulation of companies that offer securities in the market.

The most common forms of securities include:

• Stocks (equity securities)
• Bonds (debt securities)
• Options

The Howey Test: Is An Asset A Security?

In the United States, What the Howey test is used to determine the eligibility of an asset that is a security. Established by the U.S. Supreme Court in 1946, the test outlines four criteria that must be met for an asset to be classified as an investment contract (and thus a security):

• an investment of money, or where the investor has to commit cash or another form of capital.
• Common end – There must be participation with other people.
• With an expectation of profits – The investor should gain profits from the investment.
• Based on someone else’s effort – The above profit is a result of the efforts of somebody else (such as inventors, developers or a third party).

If all of these criteria are achieved then the asset shall be classified as security and must follow security laws, for example registering and providing clarity to the investors.

Are Meme Coins Securities?

Some of the cryptocurrencies are categorized as meme coins and how the Howey Test applies to them is more of a question of how they are promoted as well as how they are employed. Let’s break down the four criteria of the Howey Test in the context of meme coins:

1. Investment of Money

As with any other”normal” cryptocurrencies, meme coins can be purchased and sold through available marketplaces known as exchanges. The desired criterion of purchasing meme coins with the view to make future gains is normally accorded by investors.

2. In a Common Enterprise

When a project is actively being developed, meme coins can be said to be based on a common cause, which means that there is a development team or other organizational backbone to the project. Most meme coins stake the claim to being decentralized, however, in many of them the focus is on the retail community, but still a lot of emphasis is placed in the activities of the development teams and other people influential within the community. It might suffice this “common enterprise” standard that both share an interest in the coin’s success.

3. Expectation of Profits

The areas where meme coins perfectly fit the legal classification of securities include whether investors anticipate making a profit through the trades. Meme coins mostly undergo extra volatility because traders tend to pump the coins based on trends and influencer recommendations. Most meme coin investors invest with an eye on making profits from these investments, which satisfies part 2 of the Howey Test: the ‘expectation of profits’.

4. Based on efforts done by other people

Of course, all meme coins might be linked to an idea of decentralization or being governed by the community, most of these have centralized development teams or even personalities promoting them. Some other meme coins’ performance is solely tied to the meme creators’ activity level since they are often responsible for marketing. As a result, it means that all the profits that meme coin holders get can be associated with other people especially if the development team is dedicated, involved in the advertising, or has a strong control over the main project.

Regulatory Bodies and Meme Coins

In different jurisdictions, meme coins can cause some concerns among the regulators if these tokens correspond to securities’ definition. Here are some regulatory perspectives:

United States (SEC)

As for the regulation of Cryptocurrency, in the United States for instance, the Securities and Exchange Commission (SEC), has in the past shown a certain level of concern in the administration of Cryptocurrency. They suggested that if a meme coin is to be considered as a security, the developer team will have to meet many reporting and registration requirements. For instance, while Dogecoin and Shiba Inu are well known, they are yet to be regulated compared to other cryptocurrencies which act like securities.

Nonetheless, if meme coins will be classified as securities, the SEC may demand that projects offer disclosures to society and conform to other legal standards.

European Union

In its attempt to regulate the crypto market the EU has put forward legislation that includes the MiCA regulation. Meme coins under these regulations could be easily annexed into such regulations simply because they result from substantial investor speculation, just like the traditional cryptocurrencies. The objective of introducing MiCA consists in consumers’ protection and the fight against money laundering.

Other Regions

In other regions, for instance, in Asia, meme coins could be lawfully legally in terms of various financial laws ranging from a specific country. For instance, the meme coins in China, owing to the prohibition of cryptocurrency trading will not be treated in the same way as in regions where trading is permitted.

Consequences of meme coins being securities

If meme coins are classified as securities, several consequences could follow:

• Increased Regulation: Meme coins would have to register as securities and abide by the registration statements they file, disclosure rules, and prohibition of fraud.
• Tax Implications: Meme coin use may attract taxes that could see investors be taxed on their gains based on capital gains tax.
• Legal Risks for Developers: Those involve in the creation and promotion of meme coins may soon be subjected to legal suits for flouting the anti-securities measures.
• Market Stability: Regulatory certainty may help stabilise the meme coin markets more than anything else and may bring in more entrants in the form of institutional investors.

Conclusion

Meme coins fall in a grey area as to whether they are securities or not because due to their hype and reliance on community work, they do not meet the Howey Test criteria. Though meme coins may fulfill several of the requirements inherent to securities, their categorization can be discussed in terms of decentralization, information disclosure, and regulatory actions.

The investors need to be aware of the regulatory dangers of meme coins, especially considering that many countries have started providing classification of digital assets and setting legislation on them. Similarly, meme coins may come under pressure as the market grows more competitive, and there is a rise in regulatory measures that might slow their development forward.