This article will explain what a ‘SAFT’ is and what its appeal is to financial businesses.
What does it mean?
SAFT stands for ‘Simple Agreement for Future Tokens’. It is a term that signifies a security investment contract made for legitimate investors by blockchain developers. Because it is essentially a security construct, it must comply with all security regulations. That being said, the tokens that the investors eventually receive are fully bound to a specific purpose. What this means is that they are not securities under U.S. law.
Investopedia editor, Jake Frankenfield, breaks down the purpose of a SAFT as the following:
“Raising funds through the sale of a digital currency requires more than just building a blockchain: investors want to know what they are getting into and that the currency will be viable, and they will be legally protected.”
The SAFT follows a protocol that many finance businesses abide by. That custom is the “Y Combinator Simple Agreement for Future Equity” rule, which entails an agreement between investors and a business that enables rights for future equity.
The birthplace of SAFT is Silicon Valley and Marco Santori, President and Chief Legal Officer of Blockchain.com, later went on to adopt it and apply further development. From the beginning, SAFT was set as a solution to a novel problem – how can blockchain developers who publish a utility token raise funds without crossing the lines of regulations?
A Joint Users Interoperability Communications Exercise (JUICE) will launch a process that will help publishers of utility tokens finance their project. This will be done without violating any applicable regulations, including securities laws. Even so, utility tokens are still not seen as securities.
In an ironic twist, one of the biggest drawbacks of a SAFT is its main focus being on U.S. federal laws. It does not look at differing laws from other countries all over the globe. An additional disadvantage is that only valid investors are able to participate in a SAFT. Basically, this prevents any “ordinary” individuals from participating.
How to use it
How SAFT works is developers of a decentralized system that uses tokens create a SAFT with their authentic investors. This SAFT is also known as an ‘addressed contract.’ Accompanying the certificate is the agreement that the investor will financially support the project. Furthermore, they will receive tokens on a later date at a discounted rate. The company that develops the token network registers with the SEC (Securities and Exchange Commission). However, they do not issue any tokens at this point in time.
Following this, the founders and their team use the financial resources they acquire to further develop the network. The investors will not initially receive any tokens. As soon as the system is up and running, it is time to distribute the tokens to investors. From this point onward, those who are participating can trade tokens without any restrictions on exchanges.
Having gone over what a SAFT is and how it works, you might be wondering what the intent behind it is. What is its main objective? This is something that is very easy to explain and understand.
First and foremost, there is the distribution of a token. This basically has the benefit of trading it on the exchange. Sometime later, there is the replacement of this token for a utility token. This specific token can be a tool for any kind of benefit within a platform.
This is essentially why a Safe Agreement for Future Tokens is more or less an investment contract. It has gone through development over time in order to cater to new cryptocurrency companies. It is a way for these companies to raise capital (i.e. financial assets) without breaking any laws.
Founders and developers alike employ this model in order to obtain funding for the creation and/or development of the system. Either that or development of the technology belonging to the system itself. Investors will then receive this utility token in the hopes that there will be a business use case. If so, then they will be able to sell the tokens.
The general use of this two-tier model aims to provide a financing model for token investments. This will basically serve the purpose of the business. If it proves to be successful, trading the token will allow investors to participate in the additional development of the network. All this can be done without any financial risks arising. Moreover, the primary intention of these agreements is to encourage more institutional investors to participate in the markets.
STOs & ICOs
Something important to note is that Security Token Offerings (STOs) are essentially Initial Coin Offerings (ICOs) that try to be SEC compliant. Unlike conventional ICO, tokens from STOs are – by their very definition – securities. They provide investors with a share of the company’s assets. This, of course, will pay off; especially when the company begins to thrive.
To put simply, tokens from STOs typically involve investors to a certain percentage of the company. This is very much like stocks. Tokens deriving from STOs provide irregular returns, a stake in the company, turnout, and interest rates. What’s more, describing STOs means using a smart contract that defines the token’s exact structure. It is in the same vein as an ICO.
STOs facilitate companies to construct both whitelists and blacklists. This enables them to meet KYC (Know Your Client) obligations and comply with anti-money laundering (AML) and terrorist financing regulations. This effectively makes STOs a benchmark when it comes to transparency.
SAFE: What’s the difference?
A standard SAFT is an independent system from a Simple Agreement for Future Equity (SAFE). This allows investors who place cash into a start-up to convert that stake into equity sometime later. Developers use the funds from the sale of SAFT to expand the network and technology that creates a functional token. Afterwards, they provide these tokens to investors. There is an exception, being that there will be a market to sell these tokens to.
Due to the SAFT being a non-debt financial instrument, investors who purchase it face the possibility of losing their money. If this happens, they have no recourse if the venture crashes and burns. The document only permits investors to take a financial stake in the endeavor. This means that investors are susceptible to the exact same enterprise risk as if they had gotten a SAFE instead.
Research is key to understanding SAFT. However, you will find that it is a fairly simple concept to grasp.