A Simple Agreement for Future Tokens (SAFT) is a type of investment contract that asks investors to finance the progress of a cryptocurrency network in exchange for discounted tokens at a future date. During an Initial Coin Offering (ICO) or Initial Exchange Offering (IEO), the tokens tied to a cryptocurrency project might not be immediately accessible – either the project is not 100% complete or there are legal constraints preventing the developer team from releasing the tokens to investors – and so a SAFT is offered instead of actual tokens.
A SAFT is a security
In the US, unlike ICOs, SAFTs are limited to accredited investors, which means crypto projects can’t do early-stage public fundraising with retail investors. An accredited investor is someone is legally allowed to deal in securities based on whether they satisfy a number of requirements regarding income, net worth, professional experience, and so forth.
A SAFT is classified as a security because until the tokens are created and released, investors are putting their money in a venture based on the expectation that those tokens will sell for a higher price once the project has undergone more development. This satisfies the most basic definition of a security: investing in an enterprise with the expectation of future profits.
Navigating a regulatory maze
A SAFT is most commonly used by developer teams as a means of staying within international regulatory standards while conducting a token sale. The first SAFT was created by crypto startup Protocol Labs and used in August 2017 for the ICO of Filecoin – the investment contract was seen as a simple, inexpensive framework for achieving the fundraising goals of a typical ICO while remaining legally compliant.
That same year, Kik Interactive, a Canadian mobile messaging startup, raised $50 million after filing with the SEC and selling SAFT securities to accredited investors. However, when the same company launched its second round of funding just a month later, they did not do this via SAFT agreements and instead sold digital tokens that could be used as a utility on its service. The company argued that the tokens no longer represented an investment. Now, two years later, Kik is facing a legal complaint by the SEC on a “$100 million unregistered ICO”. This illustrates just why more and more crypto projects are turning to SAFTs as a means to raise funds – anything else seems to spell legal repurcussions down the road.
The instant messaging platform Telegram is currently facing its own saga with the SEC regarding its 2018 ICO which was also conducted via SAFT contracts.
What do you think about the use of SAFTs as a form of fundraising? Tweet us at @Liquid_Global!
