Content
1. An explanation of what SAFT agreement is.
2. The role of SAFT agreement in blockchain-based project financing.
3. Structure and content of SAFT agreement.
4. Justification of the need to engage lawyers with experience in finance and blockchain technologies.
5. Analysis of possible risks for both parties to the SAFT agreement conclusion and ways to minimize them.
6. Practical cases of using SAFT agreements in blockchain projects.
7. Conclusion.
2. The role of SAFT agreement in blockchain-based project financing.
3. Structure and content of SAFT agreement.
4. Justification of the need to engage lawyers with experience in finance and blockchain technologies.
5. Analysis of possible risks for both parties to the SAFT agreement conclusion and ways to minimize them.
6. Practical cases of using SAFT agreements in blockchain projects.
7. Conclusion.
SAFT (Simple Agreement for Future Tokens) is a type of investment agreement that is used in the cryptocurrency sector to attract investment in projects that issue tokens. The SAFT mechanism was designed to bypass regulatory restrictions associated with ICOs (Initial Coin offer ).
The basic principle of SAFT is that investors acquire the right to future tokens that will be issued by the company after the development of the product or blockchain network is completed. That is, investors first buy a SAFT, which represents the company’s commitment to issue tokens to them in the future, and after completing the development and issuance of tokens, the company undertakes to exchange the SAFT for real tokens.
This mechanism allows companies to raise funds in the early stages of a project without creating new tokens or running the risk of violating securities laws. SAFT agreements usually contain conditions regarding the timing of the release of tokens, prices and other important parameters.
It is important to note that SAFT agreements are not without risks, since they are based on the company's promises to issue tokens in the future. Investors should carefully review the terms of the contract and evaluate the risks before investing.
In many ways, SAFT regulation coincides with SAFE regulation, which is quite widely used and popular among investors.
The basic principle of SAFT is that investors acquire the right to future tokens that will be issued by the company after the development of the product or blockchain network is completed. That is, investors first buy a SAFT, which represents the company’s commitment to issue tokens to them in the future, and after completing the development and issuance of tokens, the company undertakes to exchange the SAFT for real tokens.
This mechanism allows companies to raise funds in the early stages of a project without creating new tokens or running the risk of violating securities laws. SAFT agreements usually contain conditions regarding the timing of the release of tokens, prices and other important parameters.
It is important to note that SAFT agreements are not without risks, since they are based on the company's promises to issue tokens in the future. Investors should carefully review the terms of the contract and evaluate the risks before investing.
In many ways, SAFT regulation coincides with SAFE regulation, which is quite widely used and popular among investors.
SAFT agreements were developed to circumvent regulatory restrictions associated with conducting ICOs (Initial Coin Offering), which may involve securities laws. SAFT allows companies to attract investment by offering investors rights to future tokens rather than the tokens themselves.
In fact, this agreement creates legal guarantees for the investor, protecting his property interests, while SAFT allows companies to obtain financing in the early stages of the project, when the product or blockchain network has not yet been developed or launched. Investors purchase a SAFT, which expresses their interest in future tokens of the project.
In addition, the risks for developers selling tokens are significantly reduced. When investors receive tokens, a discount arises: tokens are sold at a higher price than their value at the time of transfer under the SAFT agreement.
Please note that the structure of the SAFT agreement must comply with the provisions and requirements of the Securities Act 1933.
In fact, this agreement creates legal guarantees for the investor, protecting his property interests, while SAFT allows companies to obtain financing in the early stages of the project, when the product or blockchain network has not yet been developed or launched. Investors purchase a SAFT, which expresses their interest in future tokens of the project.
In addition, the risks for developers selling tokens are significantly reduced. When investors receive tokens, a discount arises: tokens are sold at a higher price than their value at the time of transfer under the SAFT agreement.
Please note that the structure of the SAFT agreement must comply with the provisions and requirements of the Securities Act 1933.
- Statement
The name of the Company and the Investor and the subject matter of the concluded agreement -
Events relevant to the execution of the contract
For example:
Token Delivery Date. Upon the Company's fulfillment of this Step, within 30 days of the Valuation Date (such issue date as the "Token Delivery Date"), the Company will issue Tokens to the Investor representing One Hundred Percent (100%) of the Purchase Amount.
Redemption. The Investor will have the right to require the Company to repurchase the SAFT instrument from the Investor in accordance with the terms set forth in the Redemption Agreement attached to this SAFT as an Appendix.
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Definitions
Definitions of concepts, e.g.:
"Restricted Use" means a general prohibition on Investor's ability to sell, transfer, spend, exchange or otherwise use this SAFT and Tokens on the Network.
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Rights to amend the text of the agreement
Provisions on how the SAFT may be modified. For example:
The Company may offer and sell SAFT in multiple stages and on different terms. If the Company enters into a Subsequent Agreement prior to the termination of this SAFT, the Company will provide the Investor with written notice thereof, copies of any documentation relating to such Subsequent Agreement, or any additional information relating to such Subsequent Agreement.
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Representation of the Company
- Obligation to legally carry out its activities in accordance with the laws of the jurisdiction of incorporation.
- Recognition of the execution and performance of the agreement as the Company's prerogative.
- The Agreement constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms.
- Provisions for cases limited by bankruptcy, insolvency or other laws of general application.
- Commitment of sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, processes and other intellectual property rights, without any conflict with or infringement of the rights of others.
- Confirmation of all representations and warranties.
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Representation of the Investor
- Having full legal capacity, power and authority to execute this SAFT and to perform its obligations hereunder.
- Agreement constitutes a legal, valid and binding obligation of the Investor, enforceable in accordance with its terms and conditions.
- Provisions for cases limited by bankruptcy, insolvency or other laws of general application Limited by bankruptcy, insolvency or other laws of general application.
- Purchase of an instrument for its own account for investment purposes.
- No intention to sell, grant any interest therein or otherwise distribute it.
- Confirmation of all representations and warranties.
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Additional provisions
- Possibility to change the text of the agreement with notification of the Investor
- No right of the Investor to vote, receive dividends or be deemed to own any interest in the Company for any purpose.
- No transfer of the agreement or the rights contained therein by the Investor without the prior written consent of the Company.
- Continuation of the provisions of the agreement in the event that part of the provisions are found to be invalid, illegal or unenforceable.
- Applicable law to the rights and obligations of the parties.
- Provisions on the consideration/non-registration of conflict of law provisions in the jurisdiction.
- Investor's consent to execute documents to effectuate the purposes of the SAFT.
The SAFT may have the following attachments:
- Purchase Agreement.
- Repurchase Agreement.
Both companies and investors seek to protect their interests, as well as minimize possible risks and benefit from concluded agreements.
The easiest way to ensure the security of a transaction, to calculate and provide for risks and the potential for losses, is to engage a qualified specialist. Only a lawyer with experience in finance and blockchain technologies will be able to develop a mechanism for safely concluding an agreement for both the investor and the company issuing tokens. When interacting with an investor, a lawyer will help to include in the agreement those provisions that will allow the investor to maintain control over the funds (for example, mandatory notification of the investor when making changes to the text of the agreement will allow timely receipt of all information about the implementation of the agreement). The lawyer will also check all the investor’s guarantees and assurances.
In addition, according to American law, the involvement of qualified lawyers is mandatory for the parties when concluding an agreement to confirm the legitimacy of the transaction.
When interacting with the company, the lawyer will verify information about the existence of sufficient legal rights to all patents, trademarks, as well as the presence of a license and the legality and activities of the company.
The easiest way to ensure the security of a transaction, to calculate and provide for risks and the potential for losses, is to engage a qualified specialist. Only a lawyer with experience in finance and blockchain technologies will be able to develop a mechanism for safely concluding an agreement for both the investor and the company issuing tokens. When interacting with an investor, a lawyer will help to include in the agreement those provisions that will allow the investor to maintain control over the funds (for example, mandatory notification of the investor when making changes to the text of the agreement will allow timely receipt of all information about the implementation of the agreement). The lawyer will also check all the investor’s guarantees and assurances.
In addition, according to American law, the involvement of qualified lawyers is mandatory for the parties when concluding an agreement to confirm the legitimacy of the transaction.
When interacting with the company, the lawyer will verify information about the existence of sufficient legal rights to all patents, trademarks, as well as the presence of a license and the legality and activities of the company.
One of the risks is that the regulation of SAFT is largely oriented to the US legislation, which makes it difficult to apply in other countries.
To minimize this risk, there is a need to detail many of the provisions in the text of the agreement, as well as to specify the applicable rules and clauses that will allow to resolve disputes.
Another risk is the fact that only authorized investors are allowed to participate in the agreement, i.e. those who are legally allowed to conduct transactions with SAFT, which significantly reduces the possibility of using this agreement for non-professionals in the field of investment.
The key disadvantage of SAFT is the following. Several experts take the position that SAFT does not guarantee compliance with the law, since tokens are not securities, and therefore no reporting and registration requirements are required. In practice, however, courts often support the position that SAFT allows non-compliance with legal requirements, which jeopardizes the legality of such an agreement
Another risk is the fact that only authorized investors are allowed to participate in the agreement, i.e. those who are legally allowed to conduct transactions with SAFT, which significantly reduces the possibility of using this agreement for non-professionals in the field of investment.
The key disadvantage of SAFT is the following. Several experts take the position that SAFT does not guarantee compliance with the law, since tokens are not securities, and therefore no reporting and registration requirements are required. In practice, however, courts often support the position that SAFT allows non-compliance with legal requirements, which jeopardizes the legality of such an agreement
Case: U.S. Securities and Exchange Commission (SEC) VS Kik Interactive (2019).
The regulator accuses the Company of violating the Securities Act. The tokens were sold as an investment contract, therefore subject to registration with the SEC.
Position of Kik: tokens do not have to undergo securities law registration when utilizing SAFT.
Position of SEC: the Kin meet the definition of securities under the Howey test, and the ability of investors to resell their tokens overrides Regulation 506(c).
Argumentation of Kik:
Summary: Kik's motion was denied. The court found that the token sales were not registered with the SEC as required by law.
Case: U.S. Securities and Exchange Commission (SEC) VS Telegram (2019).
Position of Telegram: tokens do not need to undergo securities law registration when using SAFT.
Position of SEC: Gram must be registered with the SEC or there is a violation of the Securities Act of 1933. It is illegal to enter into an agreement with investors.
Argumentation of SEC: Securities must be registered, there is no Rule 506(c) exemption in this case. The regulator held that Gram is not a currency, it is a security whose unregistered public offering is unlawful.
Argumentation of Telegram: the implementation contained two stages. The first was the conclusion of the agreement and the second was the issuance of Gram. The first stage would be considered a securities issuance; under this stage, the agreements were entered into in accordance with the requirements of Rule 506(c). The second phase, according to the company, does not fall within the scope of the Securities Act.
The proceeding granted the SEC's motion j to temporarily enjoin the issuance of tokens during the pendency of the litigation.
One of the Company's arguments was also that the SEC had shirked its responsibility to develop clear rules for the application of the law; the authorities prefer to use administrative measures against market participants.
Summary: the Court found that the token sale was not registered with the SEC as required by law.
The regulator accuses the Company of violating the Securities Act. The tokens were sold as an investment contract, therefore subject to registration with the SEC.
Position of Kik: tokens do not have to undergo securities law registration when utilizing SAFT.
Position of SEC: the Kin meet the definition of securities under the Howey test, and the ability of investors to resell their tokens overrides Regulation 506(c).
Argumentation of Kik:
- Under the "User Agreement," Kik's only obligation to users is to supply tokens, and the tokens themselves were intended for use in the Kin ecosystem and are not an investment opportunity.
- Two transactions: closed tokensale to accredited investors; open sale of tokens to the public.
- SEC failed to warn the company "adequately" that the sale of its tokens could be an investment contract or securities offering.
- If a token is considered an investment contract, it must be registered with the SEC, which it was not.
- The company sold tokens to unaccredited investors and failed to inform investors that the token was a security.
- Large investors purchased shares at a 30% discount .
- The main purchasers were exchanges and exchangers who intended to sell them to a wide range of investors, which could be characterized as an improper distribution of securities.
Summary: Kik's motion was denied. The court found that the token sales were not registered with the SEC as required by law.
Case: U.S. Securities and Exchange Commission (SEC) VS Telegram (2019).
Position of Telegram: tokens do not need to undergo securities law registration when using SAFT.
Position of SEC: Gram must be registered with the SEC or there is a violation of the Securities Act of 1933. It is illegal to enter into an agreement with investors.
Argumentation of SEC: Securities must be registered, there is no Rule 506(c) exemption in this case. The regulator held that Gram is not a currency, it is a security whose unregistered public offering is unlawful.
Argumentation of Telegram: the implementation contained two stages. The first was the conclusion of the agreement and the second was the issuance of Gram. The first stage would be considered a securities issuance; under this stage, the agreements were entered into in accordance with the requirements of Rule 506(c). The second phase, according to the company, does not fall within the scope of the Securities Act.
The proceeding granted the SEC's motion j to temporarily enjoin the issuance of tokens during the pendency of the litigation.
One of the Company's arguments was also that the SEC had shirked its responsibility to develop clear rules for the application of the law; the authorities prefer to use administrative measures against market participants.
Summary: the Court found that the token sale was not registered with the SEC as required by law.
SAFT (Simple Agreement for Future Tokens) agreements play an important role in financing projects based on blockchain technology, providing companies and investors with a flexible and relatively secure way to attract investment. However, despite their advantages, drafting SAFT agreements requires in-depth knowledge of securities law, financial law and blockchain technology.
The process of developing a SAFT agreement involves complex legal and technical aspects that require a professional approach. Involving experienced lawyers specializing in financial law and blockchain technologies is critical to ensure that the contract complies with the law and protects the interests of all parties.
Thus, in the context of the growing complexity and regulation in the field of cryptocurrencies and tokens, the involvement of professional lawyers to draw up a SAFT agreement becomes a necessity, ensuring the protection of the interests of both the company and investors.
The process of developing a SAFT agreement involves complex legal and technical aspects that require a professional approach. Involving experienced lawyers specializing in financial law and blockchain technologies is critical to ensure that the contract complies with the law and protects the interests of all parties.
Thus, in the context of the growing complexity and regulation in the field of cryptocurrencies and tokens, the involvement of professional lawyers to draw up a SAFT agreement becomes a necessity, ensuring the protection of the interests of both the company and investors.
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