Simple Agreement for Future Tokens (SAFT) — Explained
SAFT is the abbreviation for “Simple Agreement for Future Tokens”. The term stands for a (security) investment contract created by Blockchain developers for authorized investors. However, the tokens that are eventually transferred to the investors are fully committed to a purpose and therefore not securities under US law.
The SAFT follows the “Y Combinator Simple Agreement for Future Equity”, which has been used for many years to finance businesses.
The beginning of SAFT (JUICE)
The Simple Agreement for Future Tokens (SAFT) was first formulated in Silicon Valley and later adopted and developed by Marco Santori, who was previously a partner at Cooley LLP.
SAFT was placed as a solution to a novel problem. It should create a possibility, not yet (ready) developed utility tokens to sell. A JUICE will launch a process to help publishers of a utility token finance their project without violating applicable regulations, including securities laws. Nevertheless, utility tokens are not considered securities.
Ironically, one of the biggest drawbacks of SAFT is that it focuses mainly on US federal laws and does not look at the different laws of other countries in the world. Another disadvantage is that again only authorized investors can participate in a SAFT and so that the “ordinary people” are excluded from it again.
How does SAFT work?
The developers of a token-based decentralized system each create an addressed contract (SAFT) with their authorized investors. The certificate includes the agreement that the investor now financially supports the project and receives tokens at a discounted rate at a later date. The company developing the token network registers with the SEC but does not issue any tokens at this time. Afterward, the founders and their team use the acquired financial resources to further develop the network. Initially, investors will not receive any tokens.
Once the system is up and running, the tokens are distributed to investors. From this point on, the tokens can ideally also be traded without restrictions to Exchanges.
The intent behind SAFT is easy to explain:
First, a token is issued, which simply has the benefit of trading it on the exchange. Later, this token is then replaced by a utility token, which can then be used for any benefit whatsoever.
A Simple Agreement for Future Tokens is thus a kind of investment contract. It has been developed for new cryptocurrency companies as a way to raise capital without breaking the law. A SAFT is independent of a Simple Agreement or Future Equity (SAFE). A SAFE makes it possible for investors who invest money in a startup to convert this investment into assets at a later date.
Founders and developers use this model to obtain funding for the creation or development of the system or its technology. Investors then receive this utility token in the hope that there will be a business use case where they can now sell the tokens.
The use of this two-tier model seeks to provide a financing model for token investment that will serve the purpose of the business. If successful, trading the token will allow investors to participate financially in the (further) development of the network without incurring any significant financial risk. In addition, these agreements are intended to encourage more institutional investors to participate in the markets.
STOs are ICOs that try to be SEC compliant. Unlike ICOs, tokens from STOs are, by definition, securities. These tokens describe property, plant, and equipment and provide investors with a share of the company’s assets. Which of course pays off especially when the company is thriving. In other words, tokens from STOs involve investors to a certain percentage of the company, just like stocks. Tokens from STOs provide intermittent returns, a stake in the company, turnout and interest rates. In addition, STOs are described using a smart contract that defines the exact structure of the token, much like an ICO.
STOs enable companies to create whitelists and blacklists, enabling them to meet KYC requirements and comply with anti-money laundering (AML) and terrorist financing regulations. This puts STOs a new benchmark in terms of transparency. It could help revolutionize the future of crowdfunding and bring new life to the crypto market.
Author: Marko Vidrih