By Brian Nibley ·January 28, 2022 · 6 minute read
We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey.Read moreWe develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide.We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right.Read less
When someone has an idea for starting a new business, they typically need startup funding. Unless they already have a lot of their own money, financing for a new entrepreneurial endeavor requires fundraising from somewhere.
Crypto-related startups looking to launch a token can finance their operations using a Simple Agreement for Future Tokens (SAFT). This fundraising method is an alternative to initial coin offerings (ICOs).
Simple Agreement for Future Tokens Explained
Simple agreement for future tokens (SAFT) are a type of fundraising targeted at accredited investors (those with a high net worth). Rather than offering new tokens immediately, as would happen in an ICO, a SAFT promises investors tokens in the future, after the project launches.
Why would aspiring entrepreneurs choose to raise funds in this manner? The reason has to do with crypto regulations.
Regulatory agencies in the U.S. like the Securities and Exchange Commission (SEC) and the Commodity Futures Trade Commision (CFTC) have called for the issuance of new tokens like ICOs to be treated as securities offerings. This would make the new cryptos and the companies behind them subject to the same regulations that shares of new stocks created in an initial public offering (IPO) might be.
The SAFT has been devised as a way to avoid this kind of regulatory scrutiny. Because new coins are not issued right away as they would be in an ICO, companies and investors participating in a SAFT technically are not participating in the issuance of new securities.
SAFTs have become popular with startups because it allows them to forego the process of registering their offering with the SEC. In fact, because the tokens are being sold to accredited investors, startups often don’t have to register the assets as securities at all.
The SAFT contract itself is considered a security. But at the time of agreement, no tokens are exchanged, so the tokens are, for the time being, not seen as securities.
If this were to change, then it could mean that companies creating SAFTs acted as unregistered broker-dealers. In that case, the contracts could be voided, and the SAFTs could be canceled.
Are SAFTs the Same as ICOs?
As mentioned, while both SAFTs and ICOs involve the issuing of new tokens, they are not the same.
ICOs offer coins upfront (often some kind of utility token). Investors exchange funds for the new tokens. In SAFTs, investors put up funds for the promise of receiving new tokens at a later date.
While both SAFTs and ICOs are methods of fundraising for new crypto startups, the difference lies in when the tokens are issued. SAFTs are also only available to accredited investors, while ICOs can be made available to anyone.
Who Can Invest in SAFTs?
SAFTs are only available to accredited investors, including legal entities such as trusts, limited liability companies; businesses like banks, investment broker-dealers, insurance companies, and pension or retirement plans; and individuals with certain FINRA licenses or with more than $200,000 in annual income ($300,000 if married) for at least the previous two years or a net worth of over $1 million. Such investors are sometimes permitted to participate in riskier ventures based on the assumption that they will be better able to weather the storm if their investment doesn’t work out.
How Does a SAFT Work?
A SAFT is a cryptocurrency investment contract between two parties. How it works: A blockchain startup agrees to launch a blockchain-based project that involves some kind of token. In exchange for funding right now, the startup enters into an agreement with investors to provide them with new tokens after launch.
Investors have to pay with money now (local fiat currency) and the company has to pay with tokens later.
Because SAFTs are investments in blockchain-based companies, it’s natural for the agreement itself to be hosted on the blockchain. Smart contracts are a preferred method of enforcing SAFTs, although they could technically be drafted and signed in other ways as well.
A SAFT might be considered even riskier than an ICO, because while an ICO offers an ICO token upfront, a SAFT offers only the promise of a future token distribution.
What Are the Pros & Cons of SAFTs?
SAFTs are high-risk investments that come with their own set of unique issues. Investors could make big profits or they could lose their entire investment quickly.
SAFT Pros
Here are some of the pros of investing in a SAFT.
• Speed and efficiency. The SAFT agreement can be created as a smart contract and executed automatically after both parties have signed. This eliminates the need for a lawyer to validate the agreement.
• Immutability. Blockchain-based transactions like those executed by smart contracts can’t be reversed.
• Potential for high returns. Some new alt coins see their value skyrocket shortly after launch. A few have even attained market caps in the billions after just a year or two. Early investors could potentially see huge profits if they get lucky and cash out at the correct time.
SAFT Cons
There are also some cons of investing in a SAFT.
• High risk. The cryptocurrency behind a given SAFT hasn’t even been invented and launched yet, so there’s no guarantee that it will have any value at all on the open market.
• Not all can invest. Only accredited investors may invest in a SAFT. That means unless they can meet the strict financial requirements, the average person won’t be able to participate.
• Regulatory uncertainty. Even though SAFTs are considered a type of security, it’s unclear whether or not the tokens themselves will be declared securities at some point later on. Add to this the vague legalities surrounding the contract itself, and it adds up to plenty of uncertainty in terms of what both parties can expect.
• Smart contract risk. Developers have to create smart contracts without exploitable bugs in order for them to work successfully and not get hacked. Many smart contract protocols have been hacked in the past, resulting in billions of dollars’ worth of losses for users.
SAFT Regulations to Know
In any discussion of SAFTs, ICOs, or new tokens in general, something that often comes up is the Howey test. This test is a set of criteria that the SEC applies to an investment to judge whether it qualifies as a security.
The Howey test refers to a Supreme Court case from 1946 entitled SEC v. W.J. Howey Co. In this case, the courts ruled that a certain kind of leaseback arrangement was a security that requires registration. The outcome of the case established several criteria that can be used to decide if an investment qualifies as a security.
If an investment meets these conditions, then it is classified as a security under the Howey test:
• An investment of money
• In a common enterprise
• With the expectation of profit
• To be derived from the efforts of others
The Takeaway
The SAFT definition is this: it’s a high-risk investment in the token of a blockchain startup that is only accessible to accredited investors. Most people won’t be able to participate in a SAFT. It’s a relatively recent development and it remains to be seen how many SAFTs will prove to be scams and how regulators will respond going forward.
Photo credit: iStock/ozgurcankaya
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circ*mstances.SOIN1121498
