Advantages and disadvantages of SAFT (Future Token Agreements)

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Advantages and disadvantages of SAFT

We have already told you about ICOs several times, but did you know that as their popularity grows, they are subjected to more and more thorough regulatory checks. It is quite difficult for government agencies to classify this part of the cryptocurrency world.

According to most regulators, ICOs can transform, starting with security, but then turning into a product or other type of asset. This confusion led to the creation of the so-called Simple Future Token Agreement (SAFT), which is designed to help investors avoid misunderstandings regarding the classification of ICO tokens. And we’ll talk about this today.

Background

To understand what SAFT is, you first need to understand the background. ICOs became very popular in 2017 and quickly raised $ 5.6 billion for startups. Nevertheless, they were practically unregulated and everyone knew this very well.

The Securities and Exchange Commission (SEC), the regulator that controls the securities market, has sent over 80 subpoenas to blockchain startups. The SEC believes that most ICOs sold security tokens, claiming to sell service tokens.

Many startups did not even have a specific product during the sales period, so their coins did not have any value. The regulatory body sees this as a serious violation of securities law, which prohibits the sale without registration and mandatory paperwork.

The SEC is even questioning startups selling genuine tokens due to their aggressive marketing promising future profits. If investors buy tokens for future profit, this is a security token.

Companies issuing them must comply with strict regulatory requirements, which by itself was not and this has become a problem for many new ICOs. SAFT intends to solve this problem by selling investment contracts with securities in advance.

What is SAFT

On October 2, 2017, Marco Santori of Cooley Law Firm and the Protocol Lab team released an official SAFT document. According to this information, SAFT works as follows:

  1. Startups create agreements that now they collect money for tokens, which they will provide in the future.
  2. Accredited investors buy these agreements and pay now, waiting for profit.
  3. The agreements are investment contracts in securities, so startups register them with the SEC.
  4. Startups develop their product and launch their network.
  5. After the launch of the network, investors automatically receive their tokens, which are considered official.
  6. SAFTs are registered security tools, and tokens that are sold later are official, so startups comply with regulatory requirements.

Marco Santori considers the structure as one of the ways to work within the framework of existing securities laws. He does not expect legislative changes to adapt blockchain technology, but instead paved the way for a start-up project to capitalize on institutional funding.

Benefits of SAFT Agreement

Many in the crypto community believe that the SAFT agreement offers significant advantages, namely:

  • The two-step process, that is, a registered securities agreement followed by service tokens, complies with regulatory requirements.
  • Only accredited investors will buy SAFT, so retail investors are not at risk of losing their money in the event of a startup failure.
  • Since retail investors can buy tokens later when the platform is ready, they will also ultimately contribute to the development of the project.

Disadvantages of the SAFT

Agreement Consider the following disadvantages of the SAFT agreement before drawing conclusions.

  •  In the US, the SEC did not confirm that the two-step process in the SAFT is compliant. Therefore, the first advantage of SAFT, which some members of the crypto community claim, does not yet have legal support.
  • When accredited investors buy SAFT agreements, they do not receive any profit at the moment. However, when startups release their platform and open tokens for free sale, SAFT investors receive their coins automatically. This is more like private sales that precede ICOs. The SEC will consider such private sale of investment securities contracts as a clear violation of the securities rules. When startups sell SAFT agreements, they register them as securities contracts, but they do not register their tokens in the same way. The Securities Rules treat SAFT agreements as “convertible securities” and tokens as “underlying securities”. But startups can create tokens later, therefore, only they control when the underlying securities will be available. SAFT investors buy convertible securities, but also take the risk that the underlying securities are not currently available on the market. The SEC obliges in such cases to register the underlying securities together with convertible securities.
  • Securities rules vary from country to country, while the SAFT contract form only takes into account US rules.
  • SAFT contracts do not allow the general public to invest in the project at an early stage of development.
  • It is highly likely that all cryptocurrencies, regardless of their classification, will be legally regarded as securities, which in principle will deprive SAFT of any meaning.

Summary

Perhaps the biggest plus point of SAFT is the opportunity for institutional investors to safely invest in blockchain projects, since the agreement itself is considered a guarantee. Despite the fact that SAFT has been thoroughly tested by several legal groups, you should not use this tool without careful consultation with a lawyer, accountant, as well as a tax and investment expert. Otherwise, the risk of losing all your assets is very high.

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