SEC View Towards SAFT Style ICO-Not So Fast

April 25, 2018

SAFT is Not So Safe, Says SEC Enforcement Staff. Startups swimming in the blockchain space have continued to paddle away from securities regulation and seek what seems to be the easiest way to raise capital via Initial Coin Offerings. For the uninformed, these unrelated offerings advanced by pre-revenue entities, aka “concept companies’, provide investors with a home-made ‘cryptocurrency’ in consideration for cash. The thesis advanced by the respective Issuer is generally the same; their private-label cryptocurrency issued to investors will quickly be listed on a non-regulated electronic exchange and because its listed, the ‘investor’ will be able to sell the coin with ease, ostensibly at a price greater than what was paid. And, all of this can purportedly happen outside the jurisdiction of securities regulators because the Issuer asserts what they are selling is not a security, but a ‘utility token.’

This mantra has been embraced by dozens of Crypto Cool Kids, many of whom have been advised by lawyers who claim to be fluent in securities laws. That counsel has led folks to accept the notion that Issuers with nothing more than a ‘white paper’ can gather money with impunity from investors, who will have no recourse in the event the Issuer fails to initiate its business plan or worse still, the Issuer literally goes South with a big bag of digital currency or actual cash. For anyone who thinks this scenario is a ‘rare occurrence’,  it proves you are not a sophisticated investor and you deserve to lose every penny that you invest in private-label cryptocurrencies, which should not be confused with the now well-established Litecoin (LTC), Ethereum (ETH), Ripple (XRP) and the ubiquitous Bitcoin, each of which have robust markets that offer reasonably seamless liquidity for those wishing to buy or sell. But those pesky securities regulators insist on protecting those who may not want to be protected. To address this dilemma, some smarty-pants lawyers came up with a workaround to the structure of these offerings to appease securities regulators, enter stage left: Simple Agreement for Future Tokens aka SAFT.

Cryptocurrency and blockchain startups are trying to get around regulation using a method known as a Simple Agreement for Future Tokens.


As profiled in the 24 April WSJ article by Dave Michaels “Startups Love This Cryptocurrency Strategy. Regulators Say Not So Fast”, SAFTs are vigorously defended by a discrete universe of securities lawyers while skeptics at the SEC suggest the SAFT structure is not going to change their interpretation of the 3 Duck Rule. Below is the opening excerpt.

WASHINGTON—Startups are raising money from venture capitalists and other wealthy investors by rewarding them with new cryptocurrencies, in a bid to avoid much of the cost and regulation of traditional stock sales.

One problem: Regulators haven’t recognized the arrangement as a valid way to raise money in compliance with investor-protection laws.

The strategy is known as a presale of tokens, or Simple Agreement for Future Tokens. Companies say the SAFT is a credible attempt to fit the new world of cryptocurrencies into laws that date to the Great Depression.

Protocol Labs Inc. pioneered the structure last year when it raised nearly $200 million from investors, including venture capitalists Sequoia Capital and Andreessen Horowitz. Since then, more than 60 companies have reported raising $564 million using the concept, according to regulatory filings.

Deals structured as SAFTs try to get around the most costly regulatory requirements of raising capital.

First, the token is offered only to wealthy investors, which means the company doesn’t have to provide purchasers or regulators with a raft of elaborate financial disclosures. Later, when the company has a viable product that the token can be used to buy, the coin is distributed to the investors, who can profit by selling it. Because the token now has a consumer use, it is no longer an investment and can be freely traded, its backers say.

Unlike stock, a SAFT doesn’t offer investors a stake in the startup, meaning they get no claim on the firm’s profits or voting rights to influence the company, according to a legal framework for SAFTs that Protocol made public last year. The only thing a SAFT investor receives is the right to the token, which could have no value if the company’s blockchain-based network fails to gain traction, or if regulators intervene in a way that limits the market for the coins.

While investors buy the token rights hoping to sell the coin in the future at a higher price, Protocol and other startups say their tokens aren’t an investment because they have “utility.” That means they can be exchanged to use the startup’s service, like old-fashioned tokens that allowed commuters to ride subway trains and buses.

“This is certainly an interesting notion and inspires spirited debate among securities lawyers”, says Peter Berkman, a Florida-based securities attorney who provides ICO guidance to clients of LLC. Adds Berkman, “But, the spirited debate doesn’t mitigate the risk of an SEC subpoena.”

To continue reading the WSJ story, click here

SEC View Towards SAFT Style ICO-Not So Fast