Simple Agreement for Future Tokens (SAFT) is an investment contract offered by cryptocurrency developers to accredited investors. It is considered a security and, thus, must comply with securities regulations.
Breaking Down Simple Agreement for Future Tokens (SAFT)
Raising funds through the sale of a digital currency requires more than just building a blockchain. Investors want to know what they are getting into and that the currency will be viable, and they will be legally protected.
While a company raising money through cryptocurrency could bypass using a formal framework, to tap into global financial markets, it needs to adhere to international, federal, and state law. One way to do this is by using Simple Agreement for Future Tokens, or SAFT.
Simple Agreement for Future Tokens is a form of investment contract. They were created as a way to help new cryptocurrency ventures raise money without breaking financial regulations; specifically, regulations that govern when an investment is considered a security.
The speed at which cryptocurrencies have grown has far outpaced the speed at which regulators have addressed legal issues. It wasn’t until 2017 that the Securities and Exchange Commission (SEC) provided substantial guidance on when the sale of an initial coin offering (ICO) or other tokens would be considered the same as the sale of a security.
One of the most important regulatory hurdles that a new crypto venture must pass is the Howey Test. The U.S. Supreme Court created this in 1946 in its ruling on Securities and Exchange Commission v. W. J. Howey Co. and is used to determine whether a transaction is considered a security.
A “security” can include notes, equities, bonds, and investment contracts, and is an investment in an enterprise with the expectation of profit. Because cryptocurrency developers are unlikely to be well-versed in securities law and may not have access to financial and legal counsel, it can be easy for them to run afoul of regulations. The development of SAFT is seen as a way to create a simple, inexpensive framework that new ventures can use to raise funds while remaining legally compliant.
When a company sells an investor a SAFT, it is accepting funds from that investor but does not sell, offer, or exchange a coin or token. Instead, the investor receives documentation indicating that, if a cryptocurrency or other product is created, the investor will be given access.
A SAFT is different from a Simple Agreement for Future Equity (SAFE), which allows investors who put cash into a startup to convert that stake into equity at a later date. Developers use funds from the sale of SAFT to develop the network and technology required to create a functional token, and then provide these tokens to investors with the expectation that there will be a market to sell these tokens to.
Because a SAFT is a non-debt financial instrument, investors who purchase a SAFT face the possibility that they will lose their money and have no recourse if the venture fails. The document only allows investors to take a financial stake in the venture, meaning that investors are exposed to the same enterprise risk as if they had purchased a SAFE.