Fundraising is an important foundation for a company or venture wishing to develop their products or technology which could potentially promote innovation in an industry. Traditionally, securities are issued as an incentive to accredited investors to ensure their stake within the company or venture. The investment contract is known as a SAFE or Simple Agreement of Future Equity. When it comes to blockchain technology, a Simple Agreement of Future Tokens or SAFT’s is one of the ways for companies to issue investment contracts to secure funding from accredited investors to develop their network and technology for cryptocurrency tokens.
A Simple Agreement of Future Tokens applies to blockchain ventures, mainly, when developing a cryptocurrency in the form of tokens. The process of issuing a SAFT agreement is quite similar to that of a traditional investment contract, therefore they must comply with U.S. Securities and Exchange Commission regulations. A SAFT is considered a security because future profit is expected from the initial investment. Since a SAFT is classified as a security by the SEC, companies and ventures will generally offer a SAFT contract to accredited investors since they are the ones who are legally allowed to participate in securities transactions. But before we get into more details, how can an individual participate in a SAFT contract? Well, you must first become an accredited investor. An individual may be considered an accredited investor if they meet one of the following requirements: income, net worth, asset size, professional experience, or governance status. An incentive for accredited investors to participate in a SAFT is being able to purchase tokens at a discounted price with the will of selling them for a higher price in the future. Part of the SAFT agreement also states that these tokens are part of a private sale or a token purchase agreement. Before the ICO, investors aren’t allowed to trade, exchange, or sell their tokens. Investors can expect to obtain their tokens once the company milestone is achieved, representing 100% of the purchase amount. One might ask: what is a Simple Agreement of Future Tokens? Let’s have a look.
SAFTs are a non-debt financial instrument – meaning investors are taking a financial stake within the venture or company and are dependent upon the performance of the company. Should the company lose its value, then investors can typically expect a payment up to 80% of their initial investment in the company which in theory, makes it quite a secure one. Investors must acknowledge that 20% of their initial investment is classified as a non-refundable portion. They will receive payment before shareholders are paid because of the initial investment they made in the blockchain project for the company. One can think of SAFTs as an investment contract, in which the document states that profit is to be expected from the initial investment. The investment contract also differs from a contract because investment contracts are regulated by The Securities Act of 1933. The contract must have the following elements: investment, the firm/ company/ enterprise, profit expectation(s) and derived from the efforts of others. Both the accredited investors and the company must follow all applicable SEC rules and regulations. After the company receives the funds for the venture, the investor cannot trade, sell, exchange, or offer the token. Another incentive for investors to participate in a SAFT agreement is being able to purchase the native cryptocurrency at a discount and should it appreciate, investors can expect to make a profit. Once the investment contract is finalized, accredited investors are going to receive their stake in the company by having the equivalent value of the investment (in FIAT currency) in the company’s native cryptocurrency token. A SAFT is not the same as an ICO. The agreement itself serves as an investment opportunity for accredited investors to own tokens before they are offered to the public since most ICOs in the US are not regulated. The SAFT framework is also built on US Federal Laws which promotes a secure and transparent transaction between accredited investors and the firm.
So, what’s the main objective of issuing SAFTs? Companies could benefit from issuing SAFTs because they could ensure that funds are secured in this way, and the funds will come from a reputable individual. Funds are then used to develop the technology and network for the cryptocurrency. SAFTs could also lead to potential standardization of conducting businesses which could be beneficial for cryptocurrency startups to develop new technologies. Apart from this, SAFTs could also help to promote growth in the cryptocurrency industry by ensuring secure investments. DragonCoin, a cryptocurrency firm based in Macau, made it to several headlines in 2018 as being one of the most valuable ICOs at the time. They were able to raise 400 million USD but due to fraudulent claims, the coin was selling approximately 25% below the offering price. One of the investors was also arrested due to money laundering. SAFTs can ensure that accredited investors are capable of providing legitimate funds for firms to develop new technology in the industry. By having a transparent source of funding, companies can be confident in developing their technologies without having to worry that their operations might be shut down. As SAFTs are compliant with SEC regulations, the regulatory framework will provide accredited investors with peace of mind and a clear set of rules that ensure good governance.
Blockchain technology is an industry that might still be at its infancy stage. Cryptocurrency is a part of that ecosystem and has been proven to be volatile. With many firms going bankrupt, there will surely be a halt in the development of blockchain infrastructure worldwide. Trust seems to be one of the biggest concerns that people are facing when it comes to blockchain technology. One of the best methods to ensure and encourage more participants is to provide an investment vehicle that can assure them that they’re doing the right thing. SAFTs are one of the best ways to encourage accredited investors to participate in the industry to promote growth and eventually lead to mass adoption. If blockchain startups were to issue SAFTs, the blockchain market could definitely lead to an advancement in utility tokens.
Post Written by Brendan Cochrane, Esq., CAMS and Alexandros Papadimitrou
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