What are SAFT Agreements and How Are They Used in Token Sales?
The initial coin offering (ICO) market has been unregulated since the first token sale was held by Mastercoin in 2013. In the past year, however, several major financial regulators have announced guidance on initial coin offerings. Many regulators have stated that a substantial amount of ICOs should be classified as securities and thus fall under securities law.
To prevent falling out of favor with regulators, a new form of security has been created to aid token sales in staying compliant with regulations in the U.S. This new form of security is known as a SAFT agreement.
What is a SAFT Contract?
SAFT stands for Simple Agreement for Future Tokens. This new type of security was proposed by the SAFT Project in a whitepaper by Jesse Clayburgh and Juan Batiz-Benet from Protocol Labs, a software developer, and Marco Santori from Cooley LLP, a law firm, in 2017.
The SAFT Project refers to itself as a forum for the discussion of a regulatory framework for token sales that has been launched with the aim to create an industry standard that protects all stakeholders involved in a token sale.
The idea behind a SAFT contract is to enable accredited investors to purchase SAFT contracts during a token sale, for which they will be rewarded with the newly issued digital tokens of the ICO, once the project has developed a fully functional utility token that is actively being used in the project’s platform, product or service.
A SAFT contract is similar to a SAFE (Simple Agreement for Future Equity) contract, which has gained popularity in the startup funding space since it was pioneered by startup accelerator Y Combinator. A SAFE contract enables an investor to make a cash investment into a startup but he or she receives the shares at a later point in time in connection with a specific event such as a new financing round or the sale of the company.
SAFTs Used in ICOs
Through the use of SAFT contracts, blockchain startups looking to conduct an initial coin offering and target U.S. investors, are able to stay fully compliant with existing U.S. securities laws and financial regulations. Hence, some of the biggest names to have launched ICOs have opted for SAFT agreements exactly for that purpose.
One of the ICOs to use SAFT agreements was the Filecoin ICO, which raised over USD 257 million for the development of its decentralized cloud storage platform
More recently, Telegram, an instant messaging app, which has reportedly raised USD 850 million during its token pre-sale, has also opted for the use of SAFT agreements to attract U.S. investors from the venture capital sector.
Pros and Cons of SAFTs
SAFT agreements have several benefits for both investors and startups but also come with certain drawbacks.
SAFT contracts could lead to a standardization for token sales that would keep regulators happy while startups could continue to use digital token sales to fund the development of their products and services.
Furthermore, the number of ICO scams would drop substantially as SAFT contracts are securities that need to be vetted before they can be sold to investors and would be under regulatory scrutiny of the US Securities and Exchange Commission before, during and after the token sale.
SAFT contracts could thus help to open up token sales to a broader investor base and provide a certain degree of security for investors.
Having said that, SAFTs could only be used during the sale of utility tokens as tokens that resemble securities would fall under US securities laws either way.
The main drawback of SAFT contracts, however, is that they are currently only available to accredited investors. That means that small private investors who want to purchase a few hundred or thousand dollars worth of a new token will have to wait until the token becomes tradable in the secondary market.
Given that the ICO market has democratized startup investing and provided everyone in the world with an Internet connection access to some of the most innovative startup investment opportunities, SAFT contracts would work against this movement, which is why not everyone is in love with the idea of SAFT contracts becoming the standard for initial coin offerings.
SAFT contracts are an innovative new investment vehicle that companies who want to target US investors during their token sales can utilize to ensure that they stay compliant with US financial laws. However, given that they are only in use in the US and can only be purchased by accredited investors, they will unlike become an international standard for initial coin offerings. If anything, SAFT contracts - in their current form - can be seen as an interesting starting point for potential future ICO regulations.