Dogecoin, Pepe Coin, and . . . Fraud Coin?
If Fartcoin sounds like a joke to you, that’s because it is. If it tickles you to own Fartcoin, you can buy one Fartcoin, as of this writing, for $1.30. Fartcoin doesn’t do anything except for go up and down in price. Back in January, that price reached a high of $2.09. And, who knows, it might reach that price again, or move even higher. Maybe a whale of an investor will push the price higher in a nihilist homage to the absurdity and meaninglessness of money in a post-capitalist society. Afterall, Fartcoin’s current market cap is just shy of $1.3 billion.
Welcome to the world of memecoins, a form of digital asset that is most frequently traded on the Solana and Ethereum blockchains. Most memecoins—like Dogecoin, Pepe Coin, and Hawk Tuah Coin—invoke internet jokes, memes, or cultural phenomena and have no utility. A recent study found that 78% of memecoin investors were drawn in by social media hype and influencer promotions, with 37% being first-time cryptocurrency buyers.
It’s all fun and games until someone loses their life savings…or their democracy. Just ask Javier Milei, President of Argentina, who was caught promoting a memecoin that not only falsely claimed to benefit Argentine small business owners but also was reportedly the subject of price manipulation by the team behind it. A $5 million payment to one of Milei’s cabinet members is also reported to be part of the scandal from which Milei’s poll numbers have not yet recovered.
In addition to the occasional graft, there is an epidemic of market manipulation and rug pulls (theft of investor funds) in memecoin trading. One report found that $500 million was lost to memecoin scams in 2024. Another estimated that 41.4% of memecoin and NFT trading on the Solana blockchain is wash trading. As one economist has put it, “this sector has become a breeding ground for exploitation, manipulation, and systemic unfairness.”
So what should you do if a whistleblower approaches you with evidence of a memecoin fraud? Before agreeing to pursue it, consider whether the government is likely to pursue an enforcement action against the perpetrator and collect money from them. Critical questions include: are the fraudsters in the United States; what is the size of the fraud; is it ongoing; are there victims; and do the putative defendants have assets to pay a monetary penalty? If government action and success seem likely, then consider where to file.
Filing with the SEC is probably not the best choice, since in February the SEC Division of Corporation Finance advised that a memecoin is not an investment contract under the Howey test. The Howey test is derived from the Supreme Court’s holding in SEC v. W. J. Howey Co., 328 U.S. 293 (1946), which lays out four factors an arrangement or transaction must meet in order to constitute an investment contract. These factors are: (1) the investment of money; (2) in a common enterprise; (3) with the expectation of profit; (4) derived from the efforts of others. Id. at 301. Applying this test, the SEC concluded that memecoin fraud is not subject to SEC jurisdiction, because it “does not involve an investment in an enterprise nor is it undertaken with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others . . . That is, the value of meme coins is derived from speculative trading and the collective sentiment of the market, like a collectible.” In sum, the SEC found that memecoin trading failed to meet the second, third, and fourth prongs of the Howey test.
The CFTC may prove more receptive to a memecoin tip. The CFTC has previously alleged Dogecoin to be a commodity. The DOJ is another possibility if a “financial institution” is involved, and one could argue that any company that trades memecoins professionally is a financial institution. The DOJ has previously charged manipulative trading in memecoins. IRS Criminal Investigation is another option, since they have general fraud and money laundering jurisdiction, as well as deep experience in cryptocurrency investigations. To cover your bases, consider filing with all three.
The memecoin industry is a place where fraud is rampant and opportunities for whistleblowers abound. Nonetheless, a considered strategy in choosing cases to accept and how to pursue them, as always, is critical.
This piece was written by Daren Firestone, a Partner at Levy Firestone Muse. This piece was edited by Jonathan Lischak of Morgan Verkamp.
