Key Questions Answered
SAFT (Simple Agreement for Future Tokens) is an agreement between a crypto developer and an accredited investor. SAFT agreements help raise funding for new projects. The investor agrees to finance the development of a new project in exchange for discounted tokens at a certain date.
SAFT agreements were developed in 2017 when the increased presence of ICOs (Initial Coin Offering) attracted the attention of the SEC (US Securities and Exchange Commission). SAFT agreements aim to comply with US Securities laws and regulations and offer protection for US crypto investors. SAFTs were used by companies like Filecoin (FIL) to raise millions of dollars in funding.
SAFT agreements are only applicable to United States law. Investors who want to adhere to United States security regulations can produce a SAFT agreement when they’re financing a new crypto project. SAFTs are not accepted in the state of New York due to state regulations.
SAFTs and Securities Laws
According to the SEC’s Securities Act, issuing an unregistered security is a Federal offense and carries civil penalties. Violators who default can also be imprisoned for up to five years. Creators and investors of an unregistered security can be held liable for failing to register the securities with the SEC.
In one of the most prominent cases, the SEC charged Ripple Labs (XRP) with conducting $1.3B in unregistered securities offerings. The news caused the price of the crypto to depreciate rapidly. The SAFT agreement was designed to help investors circumvent charges by the SEC.
The SEC chairman has stated that cryptocurrencies like Bitcoin (BTC) and Ether (ETH) are not considered securities because they’re “sufficiently decentralized.” However, all new projects that don’t adhere to securities regulations and raise funding in the United States can be held liable.
What is a SAFT Agreement?
SAFTs are two-part legal structures. The agreement clarifies that the initial issuance would fall under exceptions made to so-called “accredited investors,” and that those investors would not receive the tokens during the funding round but at a later stage.
A sample paragraph from a typical SAFT legal agreement. Source: SAFT project.
As decentralized cryptocurrency transfers on the blockchain are not deemed securities by the SEC, their transfer at a later stage does not hold the investor liable for violating the Securities Act.
The idea behind SAFTs is that by the time the tokens are live and available on the blockchain, the tokens are decentralized and the investors can receive them at a discount. SAFT contract templates are publicly available on the SAFT Project website. There is a whitepaper and a form for future agreements that investors can review.
Who Wrote SAFT?
The SAFT whitepaper was released in October 2017 in cooperation between Cooley LLP, a Palo Alto, CA-based law firm, and Protocol Labs, an AI research company. The person responsible for the original whitepaper is Marco Santori, a famous blockchain advocate and top partner at Cooley LLP.
The SAFT agreement has been used to gather millions of dollars in funding for crypto projects. Prior to the introduction of SAFTs, crypto developers relied on ICOs (Initial Coin Offerings) that were heavily scrutinized by the SEC and judicial branches in the United States such as the New York Federal Court district.
Regulators started making their way into the crypto scene when large crypto projects like Bitconnect defrauded US investors of more than $2B. SAFT solves regulatory issues for both developers and investors while offering consumer-investor protections. It navigates the Federal Securities Act and money-transmitter laws in the United States and provides tax management flexibility.
What Does a SAFT Agreement Cover?
A SAFT agreement specifies certain details about the project and the investor-developer transaction. It is similar to a crypto whitepaper but tailored to investors. A standard SAFT agreement includes the following information:
- Aggregate purchase amount: The total amount of money an accredited investor places in the crypto project.
- Price per token: The amount an investor pays for tokens he will receive at a later date.
- Maximum potential ROI: The potential amount of returned investment, once all taxes and expenses are accounted
- Token number: The number of tokens the investor will be entitled to at a later date.
- Delivery date: A fixed delivery date when their tokens will be transferred or a part-by-part delivery schedule.
The crypto developer and the accredited investor consent to the written SAFT agreement and both parties must deliver as specified in the agreement.
The SAFT permits an accredited investor to invest in a crypto project by paying advance sums of money in exchange for a certain amount of tokens at a later stage. The SAFT agreement must be filed with the SEC for it to take effect.
Developers can use the advance payment from the investor to develop the project. A SAFT agreement could have a delivery date that is months or years ahead of the initial payment.
Once the basic functionality is developed and the tokens are deployed on the blockchain, the developer delivers them to the investors, who are allowed to sell them on the market for a profit. Investors won’t be subject to securities lawsuits, because they get their tokens when they are active on the blockchain.
SAFT Investor Requirements
SAFTs have strict investor requirements. The only investors who are allowed to file SAFT agreements with the SEC are accredited investors with the right to purchase unregistered securities in the US. This, unfortunately, excludes most retail investors. According to the SEC, an accredited investor is one of the following:
- A US resident with an individual net worth, or a combined net worth, that exceeds $1,000,000 (excluding their main residence).
- A US resident with an average gross annual income exceeding $200,000 in the last two years or a couple with a combined income exceeding $300,000 in the current year.
If the investor does not meet one of these requirements, they will not be deemed an accredited investor by the SEC and will be unable to file a SAFT agreement. The SEC will look into each individual investor and their IRS tax returns to ensure they’re eligible.
SAFTs vs. ICOs: Are They The Same?
SAFTs and ICOs are different. An ICO involves selling tokens to investors who are shortlisted for a token release. A SAFT is structured in a way that it requires investors wait for their tokens past a certain launch date. Moreover, the investor criteria is strict.
There is a major difference between SAFTs and ICOs. SAFTs meet regulatory requirements concerning the purchase of unregistered securities for all American jurisdictions except New York state. An ICO, meanwhile, does not meet those requirements and both investors and developers can be held liable for the sale of unregistered securities.
The SEC provided guidance on the sale of ICOs in 2017 and the SAFT agreement template was drafted in response to those regulations. There is a clear distinction in investor classes and legal structuring between these two investment agreements.
What are the Downsides of SAFT Agreements?
There are some notable downsides to SAFT agreements that investors in the crypto space should consider:
- Only applicable to US law. A foreign investor or a non-US-based investor can carry out the sale of crypto tokens without forming a SAFT agreement because they are not subject to US securities regulations. The SAFT agreement is only useful for US-based developers and investors.
- Investor requirements. An investor who does not meet the official SEC requirements for net worth or income will not be allowed to file a SAFT agreement. This automatically excludes most retail investors.
- Excludes NY residents. Two federal judges in New York have already ruled that SAFT agreements fall within the reach of US securities law. The SAFT template also specifies that an investor must not be a resident of New York.
Judicial Scrutiny of SAFT Agreements
There have been two notable court cases in relation to SAFT agreements and corporations. The first was Telegram for the issuance of their “Grams” token, and the second Kik for the issuance of their “Kin” token.
Kik Interactive Inc, a Canadian messaging app, gathered nearly $100M in 2017 for the funding of their digital token called “Kin” with a SAFT agreement structure. A federal judge in the district of New York ruled against Kik, in a lawsuit versus the Securities and Exchange Commission.
In the earlier case against Telegram for their plan to distribute their “Grams” token, the NY court rejected the theory that a SAFT structure is not subject to US securities laws.
There have not been any notable court cases regarding SAFT structures since.
A SAFT agreement is a legal framework that specifies an accredited investor can invest in unregistered securities such as new cryptos and receive their tokens at a later date when they’re released on the blockchain. The investor must not be a resident of NY and meet SEC eligibility requirements for accredited investors.
The SAFT agreement is compliant with US Federal laws, but state regulators can have their own interpretations on a case-by-case basis. SAFTs are different from ICOs because only select investors can participate in them and they receive their tokens based on a delivery schedule.