“Toxic.” That’s how veteran lawyer Marco Santori described the first “SAFT” he saw.
Created by an unidentified token seller as a way to solicit investment, Santori – the head of Cooley LLP’s fintech practice – went on to call the document a cheap knockoff of the “Simple Agreement for Future Equity” (SAFE) framework popularized by early stage investor Y Combinator.
In true startup fashion, the Cooley partner recalled that it was as if the author simply “held down control and hit ‘F'” as part of a misguided effort to replace the word “equity” with “tokens.”
But whether true or exaggerated, the story is successful in establishing two points – first, that so-called “Simple Agreements for Future Tokens” (SAFTs) are already in sporadic use, and second, that developers and entrepreneurs are badly in need of formal frameworks in their drive to sell tokens for fundraising.
It’s against this backdrop that Santori and Protocol Labs executives Juan Benet and Jesse Clayburgh are today introducing a formal white paper for the SAFT concept – an effort they hope will elevate the idea and help it realize its potential.
Far from a way to tame the creativity unleashed by a wave of initial coin offerings (ICOs), Santori framed the release as both a formalization of practices used during Protocol Labs’ recent $205 million token sale and a good faith effort to introduce a viable model designed with U.S. law in mind.
Santori told CoinDesk:
“The paper takes a time slice of what’s happening in the market today and it applies the prescriptive rules of at least the U.S. securities, money services and tax laws. Frankly, that’s one of the more powerful things about the framework – it doesn’t require too much deviation from what’s actually happening.”
And here, he notably argues that what’s happening in the ICO space isn’t the quick cash-grab that’s been advertised.
While the blockchain token fundraising model has garnered a “millions in minutes” mystique in media coverage, Santori contends the description fails to portray the difficulty inherent in launches that must navigate international law to tap a global liquidity base.
“We have only analyzed three bodies of federal law,” he said. “There are also state laws, and there’s also the laws of every damn country in the world to analyze.”
Far from a polished market standard, Santori said he sees the SAFT paper as the start of a conversation between legal experts, developers and investors on how to best advance the concept in order that it can become broadly useful.
First and foremost to understanding SAFTs is exploring how they differ from tokens, and on this matter, the paper is clear: SAFTs are investment contracts.
As outlined in the paper, SAFTs are designed to be sold to accredited investors as a means of funding development in a way not dissimilar from the way equity changes hands in traditional venture capital. In a SAFT sale, no coins are ever offered, sold or exchanged. Rather, money is exchanged for traditional paper documents that promise access to future product.
“The developers use the funds to develop a genuinely functional network, with genuinely functional utility tokens, and then deliver those tokens to the investors once functional,” the paper reads.
By ensuring that no token sales take place prior to the funding, the authors of the SAFT paper argue a key hurdle is overcome: namely, that any resulting tokens created are less likely to meet the definition of a security as put forth under the Howey Test, the standard created by the U.S. Supreme Court to judge whether offerings are securities.
“If executed as set forth in this white paper, a token sale can permit users to participate financially in that creation and growth without taking on significant enterprise risk,” the paper reads.
Still, the paper notes that it’s possible that the tokens created as a result of a SAFT still could be securities, meaning developers simply can’t use the model as a way to avoid legal counsel.
“Howey is not a black-and-white metric for security status. It is a highly variable facts-and-circumstances test,” the paper explains.
Investors pledge interest
The formalization of the document was a significant effort for more than the lawyers involved.
Also consulted over the course of its creation were investors who hope to use the tool to explore opportunities in the token market, as well as those seeking to build platforms to connect token issuers and buyers.
For example, Paul Veradittakit, a venture investor at Pantera Capital, said his firm has created its own version of a SAFT, and that it contributed findings to the white paper.
Describing the potential of the development, Veradittakit told CoinDesk:
“The SAFT is the first tremendous step to bringing a financing structure and standard for token financing that fits with the stage and intent of the companies.”
Still, the investor cautioned that SAFTs will be limited in their utility. For one, there’s the fact that the model is primarily aimed at projects wanting to raise money for tokens not intended to be securities.
Erik Syvertsen, general counsel at startup resource giant AngelList, was quick to note that SAFT in no way limits the kinds of tokens that could be eventually listed on CoinList – a new entity that the company is creating in partnership with Protocol Labs for hosting compliant ICOs.
“We’re open to working with all kinds of different projects, and that’s not dependant on using a SAFT,” he told CoinDesk. “If everyone can get comfortable with a token that has an existing network, and the developer work is complete, we would certainly be interested in that as well.”
Santori sees SAFT as a framework that offers something for all parties that are involved with, or impacted by, the spread of token sales.
This also includes policymakers who have been eyeing the market with uncertainty. In recent months, the number of global regulators who have clarified rules (or have proclaimed an interest in doing so) has been noticeably on the rise. But not all regulators are waiting for possible signs that market conditions will improve.
Following China’s lead, South Korea, one of the more active regions for cryptocurrency trading closed its doors to ICOs last week. Still, Santori hopes to change more minds before such final decisions are made more widely.
“A good chunk of the white paper is spent on talking about why this harmonizes with policy goals and the principles that drive them,” he said.
Indeed, the SAFT paper warns against a “mass exodus” of U.S. talent and jobs to jurisdictions deemed more friendly to the funding model.
“In many cases, though, projects based originally and organically in the U.S. have made the difficult decision to relocate the project to non-U.S. jurisdictions like Switzerland. This seems to be due primarily to questions around the applicability of the U.S. securities, money services or tax laws,” the document reads.
The path ahead
As for what happens now, it seems that’s up to the community. After all, as noted by those involved, a framework is only as useful as its adoption.
And issues remain that might inhibit its use. Most notably, there’s the fact that SAFTs don’t follow through on the promise inherent in the ICO model, that it would “democratize” venture capital by opening up deals to retail investors across the globe.
Indeed, Santori went so far as to call this the “most powerful” criticism he has yet come across. However, he frames this notion as idealistic and out of touch with how the market is actually developing.
While more than $2 billion has now been raised through the token funding model, the paper argues that 60–80 percent of those funds have been from accredited investors.
Still, Santori stressed that the SAFT model is simply a way to work within existing laws, one that doesn’t assume legislative change to accommodate the technology could be possible. For its part, the white paper seeks to stress the benefits of the model, suggesting SAFTs can reduce risks for VCs, while democratizing access through a vibrant secondary market.
“The SAFT network may prevent someone from buying the next bitcoin at $0.30, but they’re still going to get in at $1 or $2,” Santori argued.
Likewise, Syvertsen suggested that simply exposing such issues to a wider audience was perhaps one of the chief gains to be had from the white paper release, concluding:
“The path we’d like to see the industry move towards is to one of transparency, and that’s the greatest value of the SAFT project, smart lawyers will have a way to improve it and the document can evolve.”
Read the full white paper below.
Correction: An earlier version of this article identified Jesse Clayburgh as a founder of Protocol Labs. This has been corrected.
Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Protocol Labs and is an investor in filecoin.
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