Unregulated preliminary coin choices (ICOs) stormed onto the scene in 2016 and early 2017, elevating the collective eyebrows of the entrenched VC neighborhood. It was on this context that SAFTs, easy agreements for future tokens, have been launched. SAFTs have been hailed within the U.S. as an answer to the murky regulatory standing of ICOs and their tokens. Some individuals within the blockchain neighborhood even argue that VCs introduced in SAFTs to retain management over the startup-funding ecosystem.
Controversy apart, SAFTs do look like gaining traction as a workable choice for conducting ICOs within the U.S. markets. An organization elevating funds by way of an ICO, the place its tokens relate to a product beneath growth, would doubtless be in violation of U.S. securities legal guidelines. However, that very same firm, if its tokens are correctly crafted, could also be free to lift funds by way of an ICO as soon as the product has been deployed and is lively. So how can an ICO issuer keep away from promoting tokens earlier than product launch but nonetheless elevate the funds they should develop the product? Via a SAFT, a written promise a startup can provide to accredited traders, similar to VCs, to grant them tokens in a post-product-launch ICO in change for instant funding.
In different phrases, a SAFT lets an ICO issuer elevate ample funds to develop its venture whereas conducting an ICO freed from securities laws after product launch.
Professionals within the cryptocurrency area usually acknowledge the SAFT printed by Cooley LLP in October 2017 because the trade normal (the essential SAFT). Let’s take a look at the methods the essential SAFT might be supplemented and improved to guard traders.
The primary SAFT is lower than 5 pages in size. It’s meant to be used in a “paper and ink” transaction somewhat than for the phrases and circumstances of an internet sale. As such, relying on how a lot leverage a specific investor or fund has on its ICO issuer, there needs to be a possibility to enhance the phrases previous to signing and funding.
Here are 5 areas traders can take a look at to enhance the phrases of their SAFT investments.
1. Describe the token
At its core, a SAFT offers purchasers (traders) the suitable to be issued tokens upon the issuer’s product launch. However, the essential SAFT fails to explain the rights related to the tokens to be issued. Without such an outline, traders might discover they’re not getting what they anticipated when tokens are lastly issued. By incorporating language about token rights into the startup’s white paper and referencing these rights into the SAFT, you may set out your expectations prematurely. Alternatively, you may drop an outline of the token’s rights and obligations straight into the SAFT itself.
2. Usage of proceeds
Depending on the SAFT venture, you might wish to embody an obligation about how proceeds will probably be used. You can accomplish this with a set of issuer covenants within the SAFT. Also, if the funding is sufficiently giant, it could be applicable to incorporate unfavorable covenants that limit sure actions of the issuer with out the consent of SAFT consumers.
The issuer’s representations and warranties within the SAFT ought to profit the investor. The primary SAFT doesn’t do quite a bit on this respect. Investors ought to take into account including to the SAFT any key assumptions they’ve concerning the funding. This might embody warranties concerning the monetary standing of the issuer and the state of growth of the venture.
4. Control the timeline
A key side of the SAFT is that tokens aren’t issued till product launch. However, if the product launch is delayed, accredited traders might develop into involved. Investors may, subsequently, demand that tokens be issued previous to the launch in sure circumstances. If regulatory restrictions now not apply to the resale of the SAFT or the underlying tokens, if some exemption is discovered to such laws, or if a token can now not be thought-about a safety, traders ought to have the suitable to demand token issuance, no matter the venture’s launch date. These forms of provisions can present an additional layer of safety to SAFT purchasers seeking to exit their funding.
5. SAFT as a part of the worldwide markets
ICOs are a part of a global ecosystem, and the SAFT is usually solely wanted to handle U.S. home regulatory issues. Still, traders might wish to take into account including language to the SAFT that offers with the worldwide side of the ICO. For instance, if a U.S. accredited investor is permitted to resell the SAFT rights or the underlying tokens beneath U.S. legislation, and such resale doesn’t contradict the regulatory setting of the meant purchaser, the SAFT ought to explicitly allow such transactions.
Note that the above is a abstract of normal solutions. In follow, every venture and accompanying SAFT must be thought-about on its particular person dangers and deserves and within the authorized setting relevant on the time. This article doesn’t represent authorized recommendation and is designed for normal informational functions solely.
Brian Konradi, Andrei Danilov, and Peter Khokhlov are legal professionals and cofounders of Incremint.io, which provides escrow mechanisms for the ICO course of.
This article sources info from VentureBeat