What Is a Simple Agreement for Future Tokens (SAFT)?
A simple agreement for future tokens (SAFT) is an investment contract offered by cryptocurrency developers to accredited investors. Because SAFTs are considered securities, these tokens must comply with securities regulations.
Raising funds through the sale of digital currency requires more than just building a blockchain. Investors want to know what they are getting into, whether or not the currency will be viable, and if they will be legally protected.
While a company that decides to raise money through cryptocurrency could bypass using a formal framework to tap into global financial markets, it needs to adhere to international, federal, and state law. One way to do this is by using a SAFT.
Key Takeaways
- A simple agreement for future tokens (SAFT) is a security issued for the eventual transfer of digital tokens from cryptocurrency developers to investors.
- SAFTs were created to help cryptocurrency ventures fundraise without violating regulations.
- A SAFT can be compared to a simple agreement for future equity (SAFE), which allows startup investors to convert their cash investment into equity at a point in the future.
Understanding Simple Agreement for Future Tokens (SAFTs)
A SAFT is a form of an investment contract. They were created as a way to help new cryptocurrency ventures raise money without breaking financial regulations, specifically, regulations that govern when an investment is considered a security.
The speed at which cryptocurrencies have grown has far outpaced the speed at which regulators have addressed legal issues. It wasn’t until 2017 that the Securities and Exchange Commission (SEC) provided substantial guidance on when the sale of an initial coin offering(ICO) or other tokens would be considered the same as the sale of a security.
One of the most important regulatory hurdles that a new crypto venture must pass is the Howey Test. The U.S. Supreme Court created this in 1946 in its ruling on Securities and Exchange Commission v. W. J. Howey Co., which determines whether a transaction is considered a security.
SAFT Regulations
Because cryptocurrency developers are unlikely to be well-versed in securities law and may not have access to financial and legal counsel, it can be easy for them to run afoul of regulations. The development of SAFT creates a simple, inexpensive framework that new ventures can use to raise funds while remaining legally compliant.
When a company sells an investor a SAFT, it is accepting funds from that investor but does not sell, offer, or exchange a coin or token. Instead, the investor receives documentation indicating that the investor will be given access if a cryptocurrency or other product is created.
Simple Agreement for Future Tokens (SAFT) vs. Simple Agreement for Future Equity (SAFE)
A SAFTis different from a Simple Agreement for Future Equity (SAFE), which allows investors who put cash into a startup to convert that stake into equity at a later date. Developers use funds from the sale of SAFT to develop the network and technology required to create a functional token and then provide these tokens to investors with the expectation that there will be a market to sell these tokens to.
Because a SAFT is a non-debt financial instrument, investors who purchase a SAFT face the possibility that they will lose their money and have no recourse if the venture fails. The document only allows investors to take a financial stake in the venture, meaning that investors are exposed to the same enterprise risk as if they had purchased a SAFE.
FAQs
Understanding Simple Agreement for Future Tokens (SAFTs)
What is the difference between token purchase agreement and Saft? ›
SAFTs are used to organize the pre-sale of tokens.
In other words: investors pay you now and receive the tokens later. On the other hand, token warrants are used to give investors the right to purchase tokens in the future., Put simply: investors pay you now to purchase “the right to buy tokens” in the future.
What is the difference between a SAFE and a Saft agreement? ›
Basically, a SAFE is an agreement that the investor will pay money now and receive shares of company stock at a later date. A SAFT works similarly, with one major difference: the agreement is for tokens rather than equity (i.e. company stock).
What is a Saft token? ›
A simple agreement for future tokens (SAFT) is a security issued for the eventual transfer of digital tokens from cryptocurrency developers to investors. SAFTs were created to help cryptocurrency ventures fundraise without violating regulations.
What is a token purchase agreement? ›
This Token Purchase Agreement (this “Agreement”) contains the terms and conditions that govern your purchase of the INX Tokens, an ERC20 blockchain asset that is programmed using a smart contract that is compatible with the Ethereum blockchain (the “Tokens” or “INX Tokens”) and it defines your rights and obligations ...
What are the risks of simple agreement for future tokens? ›
Because a SAFT is a non-debt financial instrument, investors who purchase a SAFT face the possibility that they will lose their money and have no recourse if the venture fails.
What is the purpose of a Saft? ›
A simple agreement for future tokens, or SAFT, is an investment contract offered to accredited investors by cryptocurrency developers. These legal documents are an alternative to future equity and allow cryptocurrency companies to fundraise without state, federal, or international violations.
What is the downside of SAFE agreements? ›
However, there are also some disadvantages to using SAFE agreements, such as being less familiar and accepted than convertible notes, diluting founder's ownership and control, creating uncertainty for the investor, and complicating the cap table and subsequent funding rounds.
Why use a simple agreement for future equity? ›
Pros: A future equity agreement is not debt. SAFE agreements do not accrue interest, and with these types of agreements, you will not have debt on your balance sheet. Also, startups are not required to repay SAFE investors if they fail, and there is no time pressure for converting SAFE notes into equity.
What is an example of a simple agreement for future equity? ›
Suppose a SAFE is issued with a 20% discount. This means if the SAFE investor invested $40,000 in a startup whose price per share at the time of future investment comes out to be $10, he'll get the share at a 20% discounted price, which is $8. This means he'll get 5000 shares instead of 4000.
Security tokens are a form of investment, and anyone can utilize utility tokens for a particular service or product. On the other hand, a Non-fungible Token is a unique type of token and a collectible token.
What is the difference between a security token and a crypto token? ›
They are both tokens, but the crucial difference lies in their purpose, intended use, and actual use. A cryptocurrency is designed to be used as currency, money, or payment method. A security token is intended to be used the same way a stock, bond, certificate, or other investment asset is used.
What is the difference between a token and a token contract? ›
Token smart contracts are a specific type of smart contract used for creating tokens on a blockchain. Tokens represent an asset, utility or voting right, and they can be used in a variety of applications, such as digital currency, loyalty points or governance.
How does a token contract work? ›
A token contract is simply an Ethereum smart contract. "Sending tokens" actually means "calling a method on a smart contract that someone wrote and deployed". At the end of the day, a token contract is not much more a mapping of addresses to balances, plus some methods to add and subtract from those balances.
Why do I need to approve to sell tokens? ›
However, clicking buttons such as 'Transfer', 'Deposit', or 'Move' won't do anything unless their dapp has your permission—as the wallet owner—to do so. This is why token approvals are necessary: they enable the dapp to access and move your tokens on your behalf.
How do I get a token contract? ›
Where do I find a token's contract address? Block explorers such as Etherscan, BscScan, or Polygonscan hold data on ERC-20 tokens and their equivalents on their respective networks. On a desktop browser, you will see the copy to clipboard icon appear when you mouse over.
What is the difference between a token and a security? ›
Tokens that can be traded are called security tokens. The term "securities" is derived from the economic term that shares the same name and refers to a fungible, tradable asset with an attached monetary value.
What is the difference between Tokenised security and security token? ›
According to Noelle Acheson, security tokens refer to crypto tokens with security characteristics, such as revenue share or voting rights, whereas a tokenized security is a digital representation of a classical security, such as stock or bond.
