What is a Simple Agreement for Future Tokens?

TL;DR: A Simple Agreement for Future Tokens (SAFT) is a legal contract used by blockchain startups to raise funds by selling the right to receive tokens at a future date. The way the SAFT framework is structured helps blockchain projects raise capital while complying with regulatory rules, particularly in the U.S., by keeping their tokens out of the equation until they can be treated as utility tokens and not securities. Essentially, they are crypto’s version of the Simple Agreement for Future Equity (SAFE) used in traditional startup fundraising.

Where did the SAFT Come From?

Raising funds in the crypto scene has been key for the development of crypto projects since crypto became known for more than bitcoin, and the way startup initially sought to raise funds was through Initial Coin Offerings (ICOs); however, many ICOs faced, and still do face legal issues, particularly in the U.S.A, because the tokens that were sold were considered unregistered securities by the U.S. Securities and Exchange Commission (SEC).

As the SEC continues to pursue legal action against various crypto companies in U.S. courts, and other countries around the world consider the status of crypto tokens as securities or not, startups have looked to other forms of fundraising that avoid the issues that have been raised.

Based on the idea of traditional startups using SAFE, the crypto scene created and adopted the SAFT to deal with the regulatory issues and requirements of selling (potential) security tokens.

How Does it Work?

Startups looking for investors are able to offer a SAFT contract, which gives investors the right to receive the project’s tokens in the future, usually after the platform is launched and the tokens are functional and therefore are considered to have ‘utility’ (assuming they serve a purpose in the project rather than simply being issued to raise funds).

Should the project complete and go live, and the tokens can be used or traded, the startup delivers the promised tokens to the investors according to the terms of the SAFT.

In delaying the issuance of the tokens until the project is fully functional, investors don’t receive tokens right away, but instead sign an agreement to receive them in the future when the project is ready. This is intended to avoid issues with securities as, during the project’s development phase, if the tokens were sold they could be considered securities and subjected to the relevant regulation; however, once the platform is launched and the tokens have a utility, they might no longer be classified as securities (although that will depend on the token in question).

This delay in investors owning the tokens essentially makes the SAFT a security that is temporarily used to avoid the tokens being classified as securities until their utility can be proven and thus the issue of tokens being treated as securities is sidestepped.

In other words, the fundraising process still involves the sale of a security, it is just that the SAFT takes that burden and is subject to the regulatory requirements rather than the startup’s token.

Benefits:

• By issuing tokens only after a platform is functional, SAFT contracts may avoid legal issues related to securities laws when it eventually comes to the issuance of their tokens, particularly in the U.S.
• In using a SAFT, startups and developers have a way to avoid dealing with complicated legal issues that they may not fully understand.
• SAFT is mainly used with accredited investors (individuals or businesses who meet certain financial criteria), resulting in more legal protection, and ensuring that only experienced or qualified investors participate in higher-risk, early-stage investments.
• Allows startups to raise funds whilst still in development, ahead of their ICO.
• Since tokens are not immediately sold to the public, the startup’s developers have more time to work on their platform without the pressure of delivering an immediate product or token value.
• Higher Returns on Investment (ROI) have been seen when using a SAFE in traditional finance, and SAFT may offer the same benefits.
• SAFE contracts are typically offered in traditional financing once the founders have validated their business model or created an early version of the product (or Minimum Viable Product). SAFT contracts can be offered even earlier in the process, potentially allowing startups even earlier access to funding and investors even greater ROI as a result.
• SAFT contracts can be flexible in terms of the timings, offers (such as number of tokens, discounts etc) etc. than other fundraising methods such as ICOs.

Limitations:

• The use of a SAFT does not guarantee that the tokens the investors will eventually gain will have the value they hope for or that the project will even be a success, therefore, it does not make the investment less of a risk for the investor (unless taking the pressure to launch a immediate token off the startup gives them time to improve the platform).
• The use of a SAFT does not guarantee that the tokens eventually issued will be utility tokens; if the project does not make sufficient or appropriate use of them then the tokens may still be classified as securities and subject to the relevant regulations.
• By restricting those who can participate to accredited investors (or the equivalent in other jurisdictions), the pool of investors, and therefore potential capital available, is restricted until the eventual ICO.
• Startups will still have to ensure that they only offer the SAFT to accredited investors, meaning that they still need to have a way to reliably vet their potential investors.
• Whilst the use of SAFT contracts has gained most traction in the U.S. and is based around U.S. federal laws, the idea could be applicable and used worldwide, but variations in regulatory requirements in different jurisdictions may lead to issues in their implementation or use if not taken into account.
• Should the SEC take umbrage with the SAFT system, it may take action against it.