What is a SAFT? A crypto fundraising method drawing regulatory scrutiny

With an increasing number of startups choosing to raise money through initial coin offerings, or ICOs, a variation of this popular fundraising trend also has gained some traction in recent months, bringing with it much debate.

A number of companies looking to finance large digital-currency projects have turned to so-called SAFTs: Simple Agreement for Future Tokens. According to a report from the Wall Street Journal, over 60 companies have raised $564 million via this presale method.

A SAFT is a form of fundraising, intended for digital-currency startups and directed at accredited investors, which promises tokens when the project or company becomes operational. While a SAFT sounds very similar to a standard ICO, the difference is that under an ICO the tokens are issued immediately; under a SAFT it is a promise to deliver tokens.

The rise of SAFTs come as the Securities and Exchange Commission and the Commodity Futures Trade Commission have cracked down on such fundraising, demanding that coin offerings like ICOs be labeled as securities, thereby pushing them under the regulatory remit of the Washington watchdogs. However, because a SAFT isn’t technically issued upfront, regulators have grown concerned that they are being offered to sidestep the stricter rules that would be applied by the SEC and CFTC, if they were deemed a security.

Accredited investors are wealthy individuals that regulators view as better able to withstand investment losses, and usually have more than $200,000 in income or a net worth of at least $1 million.

SAFT-style capital raises were outlined in a 2017 white paper by Protocol Labs. However, upon publishing, critics highlighted potential risks.

Startups have been turning to SAFTs often because they don’t have to go through with the process of registering their offerings with the SEC. Moreover, private funds can often skip registering assets as securities altogether when selling to accredited investors, which may be one reason those types of buyers are targeted in SAFTs.

One major risk for those involved in a SAFTs, however, is the threat that regulators will decide to crack down on them, determining that such promissory agreements should be registered as securities.

Being characterized as a security, like ICOs, has greater implications for those involved in structuring SAFT deals, experts say.

Richard Levin, chair of the fintech and regulation practice at Polsinelli PC said that if regulators do take this step, then a company may have inadvertently acted as an unregistered broker-dealer and could be at risk of rescission of contract, where a contract is voided and parties are no longer obligated to the terms agreed upon.

Read:Here’s the blueprint for how ICOs are getting off the ground without SEC vetting

Aaron Wright, associate clinical professor of law at Benjamin N. Cardozo School of Law at Yeshiva University, said attorneys could be at risk for offering bad advice. “Lawyers could be on the hook for offering incorrect or incomplete information to these SAFTs,” he said. “It could be a huge mess.”

So far, the regulators haven’t made any ruling about how they view SAFTs.

Still, there may be reason to believe that regulatory watchdogs will see it in their right to label SAFTs as securities, leveraging from past legal rulings.

The SEC created the Howey test following the case of “Securities and Exchange Commission v. W.J. Howey Co.” It is a guideline for determining whether a certain transaction(s) qualifies as an “investment contract.” If the transactions are judged to be investment contracts, they fall under the Securities Act and are categorized as securities.

Read: What’s an ICO, here’s a rundown

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