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Simple Agreement for Future Tokens (SAFT)

Definition

A Simple Agreement for Future Tokens (SAFT) is a contract offering private investors the right to acquire digital tokens or cryptocurrencies that will be delivered at a future time, under the condition that the token is eventually created. Essentially, SAFT is an investment contract that is designed to manage the regulatory risks involved in the Initial Coin Offering (ICO) process. It is only sold to accredited investors and aims to facilitate the financing of a cryptocurrency or blockchain project during its development phase.

Phonetic

The phonetics for the keyword “Simple Agreement for Future Tokens (SAFT)” is: Simple – ˈsɪmpl Agreement – əˈɡriːməntfor – fɔːrFuture – ˈfjuːtʃərTokens – ˈtoʊkənzSAFT – sæft

Key Takeaways

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  1. SAFT is an investment contract primarily used in crowdfunding campaigns by cryptocurrency companies. It provides investors with the right to tokens that can be used in the future when a proposed platform is built or functionally operable.
  2. SAFT model is designed to mitigate legal risks associated with Initial Coin Offerings (ICOs) by ensuring compliance with U.S. securities laws. It does so by treating tokens as securities prior to their launch, with the intention of them eventually becoming non-securities.
  3. The investors in SAFT generally include accredited investors, and these investors are under an agreement that the tokens will not be utilized or sold until they are functional, or the network is live.

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Importance

The Simple Agreement for Future Tokens (SAFT) is significant in the realm of business and finance because it provides a legal and compliant framework for companies to pre-sell tokens or crypto-coins during an initial coin offering (ICO), before they are actually developed or made publicly available. As cryptocurrency investments grow in popularity, SAFTs safeguard both investors and developers. For investors, a SAFT provides concrete documentation and transparency that their investment is dedicated towards the development of the project. For developers, a SAFT helps to ensure that they are operating within the Securities and Exchange Commission (SEC) regulations, minimizing legal risk. Therefore, the SAFT is an essential instrument in navigating the innovative and fast-paced sector of cryptocurrency investments.

Explanation

The Simple Agreement for Future Tokens (SAFT) is primarily used to fund early-stage blockchain software companies. The main purpose of a SAFT is to provide a framework that allows for new cryptocurrency start-ups to raise capital without having to navigate the traditional and often complex processes of initial public offerings or venture capital funding. Under a SAFT, an investor agrees to fund a blockchain company, and in return, they receive a guarantee for future tokens once the company’s software or blockchain project is completed. SAFT is particularly attractive because it is specifically designed to work within the rules of the U.S. Securities and Exchange Commission, thus addressing legal and regulatory issues. This structure ensures that the tokens are not considered securities since they’re not transferred until the system is operational. Furthermore, the SAFT aids in decreasing the risk of token purchase since the investors would receive tokens only after the development of the project, thereby aligning the incentives of developers and investors for the successful completion of the project.

Examples

1. Telegram Open Network (TON): Telegram, a popular messaging application, raised $1.7 billion through a SAFT agreement in 2018. Through this agreement, telecom sought to develop and launch its own blockchain and cryptocurrency called TON (Telegram Open Network). However, after running into regulatory issues with the SEC, Telegram had to abandon the project and return funds to investors in 2020.2. Filecoin: In 2017, the decentralized storage network, Filecoin, raised over $200 million in an initial coin offering (ICO) under the SAFT model. The tokens were meant for future use on the Filecoin network. This is often cited as one of the most successful uses of a SAFT agreement.3. Kik’s Kin project: Kik, a Canadian messaging app, utilized SAFT to raise $100 million to build the Kin ecosystem and launch their token. However, the SEC charged Kik in 2019 for conducting an illegal ICO as they failed to register their operations. Kik faced heavy fines, and its SAFT agreement became the subject of significant controversy.

Frequently Asked Questions(FAQ)

What does SAFT stand for?

SAFT stands for Simple Agreement for Future Tokens.

What is a Simple Agreement for Future Tokens (SAFT)?

SAFT is a contractual agreement between a cryptocurrency developer and an investor which promises to deliver tokens at a later date. It’s used as part of a token presale before the token launching event.

What does an investor gain by participating in a SAFT?

The investor, typically a venture capitalist or accredited investor, risks their money with the hope that the tokens they receive in the future will be worth more than the price they paid.

Why is the SAFT used by startups?

It provides a method to raise funds for the development of a cryptocurrency or token before its actual launch. It is also used as an attempt to comply with U.S. securities laws.

Is a SAFT similar to an Initial Coin Offering (ICO)?

Yes, a SAFT is similar to an ICO in that they both involve preselling tokens. However, while the ICO delivers tokens immediately, the SAFT promises to deliver tokens at a later date.

Are there risks associated with a SAFT?

Yes, SAFTs carry both business and regulatory risks. The success of the token and the successful development of the project are not guaranteed. Also, while SAFTs have been designed to try to fit within U.S. securities laws, there is still some uncertainty if they fully comply with these laws.

Is a SAFT investment available to everyone?

No, due to the high level of risk and complexity, SAFTs are typically only available to accredited investors.

How do the investors make money from a SAFT?

The investors hope that the token’s value will increase over time, allowing them to make a profit if they decide to sell their tokens in the future. However, this outcome depends on the success of the cryptocurrency or token-related project and market demand.

What is the legal status of SAFTs?

SAFTs are designed to be compliant with SEC regulations for securities. However, regulations can vary by country and it’s important to consult with a legal professional before participating in a SAFT.

Related Finance Terms

  • Blockchain: This is the main technology behind cryptocurrencies. It is used in Simple Agreement for Future Tokens (SAFT) and other similar agreements.
  • Cryptocurrency: A digital or virtual form of currency that uses cryptography for security. Tokens as promised in a SAFT typically take the form of a cryptocurrency.
  • ICO (Initial Coin Offering): This is a type of crowdfunding using cryptocurrencies, which is a common method of raising capital for a SAFT.
  • SEC (Securities and Exchange Commission): The U.S. government agency responsible for enforcing securities laws, including those that may apply to SAFTs.
  • Accredited Investor: An accredited investor is a person or entity that is allowed to deal, trade, and invest in financial securities. In the context of a SAFT, the agreement is often between the development team and accredited investors.

Sources for More Information

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