SAFT: Peculiarities, Framework Efficiency, Potential Risks
SAFTs have been regarded as the next best thing to a safe haven for startups and companies that wish to raise funds by selling tokens without igniting the righteous rage of the SEC. Some think SAFT is a legal trickery, others believe it’s the answer to the prayers of all disruptors of the world. But what does it actually do? And, more importantly, what does it not do? This explainer might help you sort some things out.
What is SAFT?
It is an investment contract that is designed to meet the SEC requirements. SAFT stands for “simple agreement for future tokens.” The title itself is a reference to SAFE (simple agreement for future equity), and generally makes just one significant alteration by replacing equities with tokens.
SAFT entitles buyers to receive the project’s tokens sometime later, when the product / platform is fully deployed and operational. The creators of the SAFT model itself say that it would work for utility tokens but not for securities tokens. In most cases, tokens purchased via SAFT are utility tokens.
The template for SAFT is publicly available, and everyone can download, modify, and use it freely.
How does it work?
SAFTs are sold under Rules 506 (b) or 506 (c) of Regulation D.
Regulation 506 (b) allows projects to avoid registering their SAFTs with the SEC if the offering is private, i.e. tokens aren’t marketed or solicited in any way to the general public. However, those partaking in the sale have to be accredited or sophisticated investors. There also is a limit as to the number of potential investors: 100 for accredited, and 35 for sophisticated.
Regulation 506 (c) allows the company to market their SAFT offerings by any means available, like TV, radio, or internet, however the issuer has to have reasonable grounds to believe all investors are accredited. It means that the project has to conduct KYC (know your customer) procedures and request ID and other relevant information from anyone subscribing to the offering. Sophisticated investors aren’t allowed to buy SAFTs in this case.
Who are accredited and sophisticated investors?
Accredited investors are those who have at least $200,000 of yearly income, or net assets of at least $1,000,000.
Sophisticated investors are people who have sufficient knowledge and experience in finance and business, and who can evaluate the merits and risks of the investment in question. The company that offers tokens has to have reasons to believe that the buyers are sophisticated investors.
Who used SAFT?
Notable examples of companies using SAFT include Filecoin, PROPS, Blockstack, and PlayHall.
Is using SAFT a good idea?
Using SAFT may become a concern only if your company intends to sell tokens to U.S. nationals or residents who aren’t accredited or sophisticated investors. If none of them is involved, the SEC won’t have any interest in your offering. Still, it should be noted that regulators from other countries may have similar rules.
Another advantage of SAFT is that it can solve the tradability problem for future tokens. The SEC themselves call whatever you buy under Rule 506 (c) a “restricted security”, which means that such “securities” cannot be resold without an effective registration statement under the Securities Act, or a valid exemption from registration, like Rule 144. In English, it means that SAFTs sold under Rule 506 (c), are not freely tradable. Still, the future tokens covered by those SAFTs are likely to be freely tradable.
SAFTs are designed to comply with the requirements of the SEC and the U.S. securities legislation, so using this model might be a good idea in a sense. However, using SAFT requires sufficient legal expertise and sound economic knowledge. By no means SAFT can be viewed as a magic pill against possible problems with the regulator.
There are also some risks inherent in SAFT. Thus, utility tokens sold under a SAFT still can be recognized as securities if they have the characteristics of such, at least from the SEC’s point of view. They will be tradable only on licensed broker-dealer ATS platforms like tZERO, or on registered stock exchanges. Thus, using SAFT implies certain restrictions on its holders even after the tokens are actually released.
Is the SEC happy with SAFT?
The SEC hasn’t yet voiced its official position in regard of SAFT. However, practice shows that even utility tokens for a project that hasn’t been developed yet may be construed as securities by the regulator.
Please note that this feature should not be construed as investment, legal, tax, or any other form of advice.
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