When Insider Trading Isn't Insider Trading

Meme Coins and Tomfoolery

Picture this:

You're a mid-level executive at a public company. You attend a confidential meeting, and lo and behold, it turns out your company is merging with another big public company. You know this is huge; the market is going to love it. You call your sister-in-law (the one with the day-trading hobby, not the one with the essential oils pyramid scheme), and you say, "Hey, just hypothetically, you might want to buy some of our stock." She does. The merger is announced, the stock pops 30%, and suddenly you’re explaining to the SEC why this isn’t technically insider trading even though—yeah—it obviously is. That's illegal. It's also a breach of fiduciary duty, a breach of your employment contract, and a pretty decent way to ruin Thanksgiving.

Now picture this: You’re at, oh, let’s say, a private presidential inauguration ball that hypothetically happened on January 17, 2025.

One of those exclusive affairs with tuxedos and champagne that, let's be honest, you'd have never been invited to if you hadn’t donated to the campaign. Someone whispers to you, "The president-elect is launching a meme coin. It’s gonna be huge." You text the same sister-in-law: "Buy this coin." She does. The meme coin launches, it goes from $0.20 to $7.00, and your sister-in-law is shopping for a beach house in Florida. Now, this situation feels a lot like insider trading—there's confidential information, there’s trading, there’s a family member cashing in—but it’s probably not. Sorry?

Why Not Insider Trading?

Let’s break this down. Insider trading laws are a weird mix of elegant simplicity (don’t trade on secret information) and maddening complexity (what even is secret information?). At their core, they apply to securities: stocks, bonds, options, and anything else the SEC has decided to regulate. Meme coins, though? Cryptocurrencies, virtual tokens, decentralized financial instruments? Probably not securities. Not yet. The SEC has been arguing for years that some tokens are securities (see: Ripple and Coinbase), but they haven’t exactly been handing out clear, consistent answers.

So, insider trading laws probably don’t apply to meme coins the way they would to Apple stock. If you work for Apple, knew about the next big product launch, and traded on it, that’s insider trading. But if you knew that someone was about to launch a Pokémon-themed meme coin and you traded on that? Probably not. Insider trading laws don’t cover your Pikachu JPEG collection or your nephew’s garage sale, and they probably don’t cover meme coins either.

This is where things get a little philosophically uncomfortable, because it feels like it should be a crime, right? You had material, nonpublic information about a financial asset, and you used it to make money. But laws aren’t based on vibes. They’re based on words, and the words right now don’t clearly extend to meme coins.

Governments write down laws so its citizens can 1) know what is illegal and 2) have certainty about the law. That works most of the time but is sometimes hard to swallow for things that feel like crimes. Something being fishy and something being a crime feel similar but are legally quite distinct.

The Materiality Test

Speaking of vibes, let’s talk about materiality. Materiality is a fancy lawyer word that means, "Does this information actually matter?" More specifically, would a reasonable investor care? Courts describe it as whether there’s “a substantial likelihood” that disclosing the information would have “significantly altered the total mix of information made available.” (If you’re keeping score at home, that’s from TSC Industries v. Northway, Inc., a very exciting case if you’re the kind of person who reads Supreme Court opinions for fun.)

Let’s say you work at Google, and you tell your sister-in-law, "Sales are good." That’s probably not material. Everyone assumes Google sales are good. If you said, "Our AI division just cracked the secret to immortality," well, that’s probably material.

So what about this meme coin? Is knowing the president-elect is launching it "material"? Maybe, but maybe not. It’s nice-to-know information, but it’s not clear it would significantly alter a reasonable investor’s decision.

But Is It Fraud?

Here’s where it gets interesting. Fraud doesn’t require the meme coin to be a security. Fraud is broader. To wildly oversimplify, fraud is when you take someone’s money by lying to them. If you steal their wallet, that’s theft. If you hold them at gunpoint, that’s robbery. If you say, "Give me $10,000 for this startup," knowing full well the "startup" doesn't exist, that’s fraud.

A fraud case might look something like this: The organizers promised they were locking up 80% of the supply to create scarcity. You bought in because you believed that promise. Then they secretly dumped the locked-up coins, flooding the market and tanking the price. That would be a classic rug pull. Fraud? Absolutely.

But in this case, nothing like that happened. The $TRUMP organizers didn’t need to do fraud because the coin just ... worked. It launched, it mooned, and everyone got rich. Well, at least until the price inevitably crashes, as these things do. But that’s not fraud—that’s just crypto.

Fishy vs. Criminal

This is the real lesson here: Just because something feels fishy doesn’t mean it’s illegal. The law draws bright lines so people can know what’s allowed and what’s not. Meme coins exist in the murky waters outside those lines, which is why so much weird stuff happens in crypto and so little of it ends up in court. Is that frustrating? Sure. Does it mean we need new laws? Maybe. But for now, doing insider trading with meme coins is almost comically easy to avoid. Just don’t lie, don’t steal, and you’ll probably be fine.

Sigh.

(PS: Coinbase tallied a win in court recently, which maybe brings us to more clarity, but that's for another post).

Brad Hughes is a a former federal securities fraud investigator, current regulator, financial crime + money laundering + fraud expert and lawyer. Real-time updates @investflags.