This article explains the key factors to consider when assessing the legal status of a meme token, particularly in the context of a go-to-market (GTM) strategy. Read on to discover the legal risks associated with meme token design and tokenomics, the technical structure of the token generation event (TGE), and meme token transactions. If you’re a Web3 developer thinking about using a meme token launch as a GTM strategy, this guide will help you navigate your launch responsibly and implement the appropriate safeguards to mitigate potential future risks.
The rise of meme tokens as a GTM strategy for Web3 projects
Meme tokens have become a popular go-to-market strategy for Web3 protocols and dApps, helping them attract more attention from crypto-native users and simplify the onboarding experience into the world of Web3 for non-crypto users. While meme tokens might seem like “tokens just for fun” with no useful utility for Web3 ecosystems, they've already made an impact by helping Shibarium, Berachain, Bonk, and other projects to build communities around their technologies and improve the adoption of their applications.
The meme token-related GTM strategy is evolving as more Web3 projects adopt it. Earlier this year, 40,000 to 50,000 new meme tokens were launched daily. This trend is further evidenced by major ecosystems like BASE, Tron, Solana, and Polkadot launching their ecosystem-native platforms for meme tokens. However, as best practices for meme token launches haven't been established yet, Web3 developers may overlook important legal and compliance details, potentially leading to negative consequences. In this article, we'll analyze these issues and discuss possible risk mitigation measures to help Web3 developers when they’re considering meme tokens as a GTM strategy for their solutions.
💡Worth checking: Utility Token Launch Legal Guide
Legal risks of launching meme tokens
Meme tokens, which are primarily used for community-building efforts and generally lack any other utility, often don’t create tangible value. However, teams launching meme tokens can still face considerable legal and regulatory risks:
- Classification of meme tokens as unregistered securities
- Categorization of meme token promotion campaigns as financial promotions requiring mandatory authorization
- Designation of meme token transactions as regulated activities (financial services) subject to mandatory licenses
- Potential involvement of meme tokens in illegal activities (money laundering and terrorist financing)
- Violation of sanctions regulations
- Market manipulation (wash trading, pump & dump schemes, and other illegal practices involving digital assets)
- Tax evasion
This list is not exhaustive, as there are various types of meme tokens, use cases, and distribution methods. Each of the aforementioned risks could result in both regulatory fines on projects and criminal liability for project developers.
Key considerations for risk mitigation
Having outlined the risks above, the following key factors are typically considered when assessing the legal status of meme tokens:
- Meme token design and tokenomics, including use cases and incentives for token holders.
- The technical structure of the token generation event (TGE), including the launch of the token smart contract, token pre-mint, and the level of decentralization of the underlying network and the 3rd parties (launchpads) involved in the distribution of the tokens.
- Meme token transactions conducted by promoters or the network, such as token sales and airdrops.
Each factor must be examined from a risk perspective to effectively navigate a meme token launch and mitigate potential future risks.
Securities compliance of meme token design and tokenomics
Typically, meme tokens lack utility and are launched purely for entertainment. However, meme tokens can incorporate community-related use cases when used to promote Web3 applications and drive adoption among non-Web3 audiences. These may include access to exclusive events, on-chain gift-giving, and features that encourage user collaboration and horizontal relationships. When designing tokenomics for meme tokens, Web3 developers should exercise caution with use cases that might be considered regulated financial services or instruments (e.g., buy-backs, staking, yields, reward/dividend distribution). These features could lead to the tokens being legally classified as securities.
Beyond token use cases, it's crucial to consider token distribution after the token generation event. Developers should avoid concentrating a substantial amount of tokens in their own wallets, as this could lead to their classification as insiders and the project as a common enterprise issuing tokens. Instead, tokens should be distributed equitably. It's advisable to eschew the traditional TGE approach with a pre-minted token treasury in favor of a fair token launch, as described below.
Financial and sanction compliance of technical infrastructure for a meme TGE
By opting for a fair token launch (rather than the TGE with a pre-minted treasury), Web3 teams are choosing an approach that enhances transparency in token distribution, prevents token concentration among a centralized group of developers, and mitigates potential harm to the market.
In fair token launches using L1, appchain, or parachain networks, validators become involved in deploying and supporting the permissionless token smart contract developed by the Web3 team. Consequently, the team must carefully assess the compliance of the blockchain network and its validators with financial and sanction requirements. For instance, the network should be run by OFAC-compliant validators that don't support transactions affiliated with sanctioned or blacklisted wallets.
Furthermore, it's essential to ensure the blockchain network is sufficiently decentralized, with a diverse network of validators capable of independently supporting the blockchain and maintaining transparency in its consensus algorithm. If the validator network lacks adequate decentralization, these validators might be considered active participants (“promoters”) of the meme token project.
When it comes to public communications and website availability it's crucial to implement robust and effective measures to restrict website access for users from sanctioned countries. IP geoblocking or geofencing will ensure compliance with international regulations and prevent unauthorized access.
📚Read more: The “Decentralization Test” for Web3 Protocols
Advertisement and financial promotion compliance of meme token distribution
Web3 developers creating meme tokens and network validators aren't the only ones who should carefully prepare for a meme token generation event. Given the viral nature of most meme token projects, third-party platforms (e.g., launchpads for meme tokens) used for token distribution and influencers (key opinion leaders or ‘KOLs’) who promote new, fun tokens are also involved.
For meme token launchpads, the supporting community should thoroughly evaluate these platforms from both a financial and sanctions compliance standpoint. It's crucial to ensure these platforms have sufficient measures to prevent people from sanctioned countries from participating in launchpad campaigns. This includes adequate IP geoblocking/geofencing and on-chain Know Your Transaction (KYT) modules to prevent illegal activities like terrorist financing and money laundering.
For influencers and social media campaigns, since meme tokens operate on-chain and may be considered digital assets, KOLs, and token communities should exercise caution in their marketing and promotional activities. These efforts could potentially trigger financial promotion regulations. As an example, the UK's Financial Conduct Authority (FCA) has already issued guidance for firms and finfluencers on how to keep their social media ads lawful.
Meme token airdrops are a clear indicator of developers' intent to build and engage a community. These campaigns distribute tokens for free, aiming to introduce non-Web3 users to blockchain wallets and on-chain transactions. Since airdrops involve no monetary exchange, they reduce the risk of tokens being classified as securities. This allows projects to distance themselves from financial products and provides greater flexibility in their marketing and advertising efforts.
When designing interfaces for Web2 users interested in meme token airdrops, ensure that your messaging complies with e-commerce and advertising regulations. Additionally, be mindful of financial services promotion regulations, as certain promotional activities related to digital assets may trigger these rules.
Risk assessment checklist for meme token launch
The global regulatory environment for crypto projects remains uncertain, making it nearly impossible to launch risk-free tokens—even those solely intended for entertainment, like meme tokens. However, implementing risk mitigation measures at the project’s outset can help Web3 developers decrease the risks of future issues and enhance market transparency.
Consider the following risk assessment and mitigation measures:
⬜ Design tokenomics with a community focus: Structure the tokenomics to emphasize community-building, avoiding features like dividends, rewards, or investment returns that could potentially classify the token as a security.
⬜ Adopt fair token launch practices: Ensure a fair token launch for your Token Generation Event (TGE) to maintain transparency and equity.
⬜ Use airdrops for distribution: Opt for airdrops over token sales for distributing tokens to minimize regulatory concerns and promote user engagement.
⬜ Avoid financial and regulated use cases: Steer clear of token applications related to financial or other regulated activities such as swaps, buybacks, staking, or yielding to avoid regulatory scrutiny.
⬜ Refrain from promising investment returns: Do not make any promises regarding financial returns as this may result in the token being classified as a security.
⬜ Evaluate compliance of blockchain networks and launchpads: Assess the financial and sanctions compliance of the blockchain network and launchpads you choose for deploying and distributing your meme token.
⬜ Ensure marketing compliance: Review all marketing and promotional materials to ensure they adhere to financial promotion regulations.
⬜ Consider legal entity registration: Register an entity to protect project developers during the pre-TGE stage. Check our utility token launch guide for more information.
⬜ Plan for decentralized governance: If implementing decentralized governance, consider registering a legal wrapper for the token holder community in the post-TGE stage.
Prepare your meme token GTM legal strategy with help from Legal Nodes
Understanding the legal implications of your meme token’s go-to-market strategy is crucial for a successful and compliant launch. At Legal Nodes, we specialize in guiding Web3 founders through the complexities of token launch strategies, helping you navigate the nuances of legal qualifications, token distribution models, and regulatory compliance.
We assist Web3 entrepreneurs by:
- Identifying the legal classification of your token and its implications
- Analyzing whether your token distribution model is centralized or decentralized, and understanding the legal consequences of each model
- Setting up and managing the legal requirements for your token launch, issuance, and distribution, including registering entities and preparing licenses and documentation
For expert guidance on developing the best legal strategy for your meme token launch and to receive ongoing support with all your token-related legal needs, reach out to us today. Let Legal Nodes help you build with confidence and stay ahead in the evolving Web3 landscape.
Legally structure your meme token launch
