As the popularity of Initial Coin Offerings (ICOs) has risen around the world, so has the need to create a uniform legal framework to assist regulators in interpreting the transactions carried out by potential investors and beneficiaries. ICOs have become somewhat of a go-to method of raising quick capital for blockchain savvy startups, and the global media has a developed a tendency to portray them as an unfounded “get rich quick” scheme. Needless to say, such an interpretation makes all regulatory bodies very nervous about the implications of ICOs, and has led some to take a hardline stance against ICOs until the dust settles and the regulatory implications become more clear. For an example of such drastic measures, one only needs to look to the complete banning of ICOs in South Korea this past September.
For regulatory bodies who still remain open to the benefits of ICOs, there is a lot of research to be done and actions to be taken in order to incorporate the blockchain based fundraising scheme into modern statutes. In the meantime, the legality of ICOs and financial interactions within blockchain based technology remains somewhat uncertain, which hinders growth and encourages companies to relocate to historically more relaxed regulatory environments like Switzerland.
Enter the Simple Agreement for Future Tokens (SAFT) framework.
Up until now, SAFT has been sporadically used as a legal basis for pre-token sales in US. By sporadically, I mean that several startups have created it as a so-called knock-off of the Simple Agreement for Future Equities (SAFE) framework that has historically been used to provide the legal basis for traditional early stage investment in startups. One author of the current SAFT framework, created in part by the Cooley LLP firm, remarked in regard to the half-baked early SAFT agreements and their SAFE “ancestors” that it looked like someone “held down control and hit ‘F’” as part of a misguided effort to replace the word “equity” with “tokens” (Quote from CoinDesk).
The SAFT framework only applies to “utility tokens,” which are different from “security tokens” in that they represent something of inherent value as opposed to stake in a company that can be compared to a traditional share or stock in said company. As the SAFT Whitepaper says, “the SAFT framework works for tokens which are not themselves independently securities. That is to say, it works for utility tokens, not securities tokens.” For tokens that are not securities in and of themselves, the SAFT framework seeks to provide a recognizable legal framework that characterises contracts originating in the early stages of blockchain based startups. That seems like a lot of jargon, so let me provide an example:
Company A is issuing a pre-token sale in order to raise money to create their functional network and service. The sale transfers the rights of future tokens, or existing non-functioning tokens, to participating investors in exchange for capital. Prior to SAFT, the legal implications of such a pre-token sale were unclear to say the least. SAFT aims to step in and render this situation more clear in the eyes of existing regulatory bodies, such as the SEC in the US.
The details of the legal framework of such a sale are outside of the scope of this brief article, but you can find them on Pages 16-20 of the SAFT Project Whitepaper itself.
So why should you care about all this?
By providing a legal framework for the execution of an ICO, the SAFT Project aims to mitigate the risk of regulatory bodies completely outlawing the ICO process like the South Korean government did amidst the perceived inability to effectively regulate it. In essence, the SAFT Project is like an ambassador that represents blockchain based practices to interested regulating bodies. This is a huge step for the crypto industry, and will open up new opportunities for blockchain based companies to expand into a legally sound space instead of having to constantly look over their shoulders and worry about the implications of legal gray areas.
Especially in the context of American based startups, the SAFT framework will hopefully encourage American companies to stay in the US amidst a more certain legal context, instead of relocating overseas to dodge the uncertainty of American regulators. As an American myself, I know that I have been frustrated by many blockchain based startups that have refused to deal with American clients for the very reason of regulatory uncertainty. With the continued development and utilisation of SAFT, I am optimistic that this problem will ultimately subside.
Questions or comments about SAFT? Leave them below!