Raising funds for a cryptocurrency venture can be a challenging process, but the use of Simple Agreements for Future Tokens (SAFTs) can provide some clarification. The main purpose of a SAFT is to provide investors with regulatory compliance when purchasing tokens before they are issued. In this article, we will discuss the basics of SAFTs and what you need to know about SAFTs!
What is a SAFT, and how does it work?
A SAFT (Simple Agreement for Future Tokens) is a type of investment contract that allows investors to purchase tokens before they are released on a blockchain.
The contract terms are typically set by the project team and agreed upon by both parties before any money changes hands. Once the tokens are released, the investor will receive them in their wallet and can then use them on the platform or exchange them for other cryptocurrencies.
Although some have criticized SAFTs as being risky, they can be a helpful way for investors to get involved in a project at an early stage. In addition, SAFTs can help to ensure that a project has enough funding to reach its goals.
You might be wondering how SAFT works.
In SAFT, purchasers give funding to a project in exchange for the right to receive tokens at a future date. This type of arrangement allows projects to raise money while still complying with the security regulations.
The key feature of a SAFT is that the tokens are not issued until the project reaches a specific milestone, known as a “trigger event.” This trigger event can be the launch of a functional network, the completion of software development, or some other milestone.
Once the trigger event occurs, the purchasers can exchange their SAFTs for tokens. SAFTs are often used by blockchain-based projects looking to raise money through an initial coin offering (ICO).
However, it’s important to note that not all ICOs use SAFTs – some projects may choose to issue tokens immediately without using a SAFT.
One of the most important regulatory hurdles cryptocurrency ventures have to overcome is the Howey test when considering SAFT. What is the Howey Test?
Howey test
The Howey test, also called the investment contract test, is a four-factor test used by courts to determine whether an arrangement is an investment contract under U.S. securities law.
The term was first used in 1946 and was named after the Supreme Court case of SEC v. W.J. Howey Co., in which the Court held that a land sale with an agreement for service was an investment contract.
Courts have since applied the Howey test to other types of arrangements, including joint ventures, limited partnerships, and even employment contracts.
The four factors of the Howey test are:
- an investment of money;
- in a common enterprise;
- with the expectation of profits;
- derived from the efforts of others.
If all four of these factors are present, the arrangement is likely to be considered an investment contract and subject to securities regulation.
The benefits of a SAFT agreement
Now that we have discussed what a SAFT is and how it works. Let’s look at some of the benefits of using a SAFT agreement.
- It can help to ensure compliance with securities regulations. By using a SAFT, projects can avoid some of the regulatory hurdles associated with ICOs.
- SAFTs can provide clarity for both investors and project teams. The terms of the agreement can be set in advance, which can help avoid misunderstandings down the road.
- They can help ensure that a project has enough funding to reach its goals. By using a SAFT, projects can raise money from investors before they issue tokens.
- SAFTs can also be used to lock in investments from early backers. This can help ensure that a project has the support of its community from the outset.
- They help reduce the chances of ICO scams. By using a SAFT, there would be the provision of increased security due to the thorough vetting process involved.
Drawbacks of a SAFT agreement
While there are some clear benefits to using a SAFT agreement, some potential drawbacks are also to be considered.
- SAFTs can be complex and time-consuming to put together. The terms of the agreement need to be carefully crafted to comply with the security regulations.
- They may not be suitable for all projects. Some projects may choose to issue tokens immediately without using a SAFT.
- SAFTs may not be available to all investors. In some cases, only accredited investors may be able to participate in a SAFT agreement.
How to create a SAFT agreement
If you’re considering using a SAFT agreement for your project, there are a few things you’ll need to do to get started.
First, you’ll need to identify the trigger event that will allow investors to exchange their SAFTs for tokens. This trigger event can be the launch of a functional network, the completion of software development, or something else.
Next, you’ll need to draft the terms of the agreement. These terms should include the amount of money being raised, the price per token, and the date when investors can exchange their SAFTs for tokens.
Once the terms of the agreement have been finalized, you’ll need to find investors interested in participating. This can be done through online forums, social media, or other channels.
Finally, you’ll need to execute the agreement and provide investors with their SAFTs. Once the trigger event has occurred, investors will be able to exchange their SAFTs for tokens.
SAFTs can be a helpful tool for projects looking to raise money through an ICO. However, it’s important to understand the potential drawbacks of using a SAFT agreement before deciding.
SAFT Regulations
The SAFT framework is a set of regulations governing the sale and purchase of digital tokens. The SAFT framework was created by the U.S. Securities and Exchange Commission (SEC) to protect investors from fraud and ensure that digital token sales comply with securities laws.
Under the SAFT framework, digital tokens are classified as securities and are subject to the same rules and regulations as other securities. This means that digital token sales must be registered with the SEC and that digital tokens must be offered and sold only to accredited investors.
The SAFT framework is designed to protect investors by ensuring that they understand the risks involved in investing in digital tokens. It also ensures that digital token sales comply with all applicable securities laws.
Simple Agreements for Future Tokens (SAFT) vs. Simple Agreement for Future Equity (SAFE)
The SAFT framework is often confused with the SAFE (Simple Agreement for Future Equity) framework. However, the two frameworks are not the same.
SAFE is an agreement between an investor and a company that gives the investor the right to receive equity in the company at a future date. SAFE does not confer any ownership rights or voting rights to the investor.
On the other hand, SAFT is an agreement between an investor and a company that gives the investor the right to receive a digital token at a future date. SAFT confers ownership rights and voting rights to the investor.
Digital tokens purchased under a SAFT are subject to SEC regulation as securities. Digital tokens purchased under a SAFE are not subject to SEC regulation.
The key difference between the SAFT framework and the SAFE framework is that digital tokens purchased under a SAFT are subject to SEC regulation as securities. This means that digital token sales must be registered with the SEC and that digital tokens must be offered and sold only to accredited investors.
Simple Agreements for Future Tokens (SAFT) vs. Initial Coin Offering (ICO)
The key difference between a SAFT and an ICO is that a SAFT is only available to accredited investors, while an ICO is available to anyone. SAFTs are subject to SEC regulation, which means they must be registered with the SEC and comply with certain disclosure requirements.
ICOs, on the other hand, are not subject to SEC regulation and do not have to comply with disclosure requirements. So, why would someone choose a SAFT over an ICO?
The main reason is that accredited investors are generally more sophisticated than the average investor, so they can better understand the risks involved in investing in a startup.
Another reason is that the SEC’s disclosure requirements provide accredited investors with more information about the company and the offering, which helps them make more informed investment decisions.
So, if you’re an accredited investor looking to invest in a startup, a SAFT may be a better option than an ICO.
Final thoughts
The SAFT is an important step in developing cryptocurrency and blockchain technology. Providing a legal framework for investing in tokens allows companies to raise money while protecting investors. It will be interesting to see how the SAFT develops and grows. If you’re thinking of investing in a digital token, carefully research the company and the offering. Make sure you understand the risks involved and don’t invest more than you can afford to lose.
Featured Image: Megapixl © Pattanaphongphoto
