SAFT EXPLAINED: HOW IT WORKS IN TOKEN FUNDING

What is a SAFT?

SAFT stands for “Simple Agreement for Future Tokens” and is a legal framework that has become increasingly prominent within the blockchain and cryptocurrency space. Modeled loosely after the SAFE (Simple Agreement for Future Equity), the SAFT allows projects, typically early-stage blockchain startups, to raise capital by promising future access to digital tokens that will be developed and distributed at a later date.

At its core, a SAFT is a contractual agreement between accredited investors and a company or project’s development team. The investors provide funding for the development of the network or platform. In return, they receive rights to receive tokens once the system’s development is complete and the tokens are functional and usable, ideally in a decentralized ecosystem.

The SAFT framework aims to comply with U.S. securities regulations and other global standards by arguing that while the SAFT itself is a security, the resulting tokens—once they are fully functional and not primarily used for investment—may not be. This helps separate the investment process from the token's ultimate utility, satisfying regulatory concerns and providing greater transparency in token fundraising events.

The use of the SAFT became particularly prominent after the U.S. Securities and Exchange Commission (SEC) began scrutinising Initial Coin Offerings (ICOs) for potentially violating securities laws. By using a SAFT, projects attempt to pre-empt potential legal issues by complying with securities regulations during the fundraising phase, and only releasing the tokens once they are sufficiently decentralised or functional to arguably fall outside of the SEC's purview.

The SAFT framework was introduced in a whitepaper co-authored by Cooley LLP and Protocol Labs in 2017. Though it’s not a perfect or universally accepted model, it provides an important scaffolding that attempts to protect both investors and projects, while promoting innovation in blockchain fundraising.

In essence, the SAFT transforms how capital is raised in the digital asset world by providing a clearer regulatory path forward, albeit often one that is still subject to debate, interpretation, and evolution alongside emerging legal precedents.

How SAFT is used in token funding

The SAFT is primarily used during the fundraising stage of a blockchain or cryptocurrency project, particularly when the token itself is not yet functional. The model allows developers to secure financial backing while legally navigating the complex regulatory environment associated with token launches and securities law. Here's how it typically works:

1. Pre-functional token stage

Most blockchain projects require funding well before they have a working network or functional token. During this critical early stage, a developer team or company drafts a SAFT agreement and offers it to accredited investors. In exchange for their funds, the investors receive a contractual right to receive specific blockchain tokens at a later date—usually upon completion of development and network launch.

2. Regulatory segmentation

The key objective of using a SAFT is to separate the investment itself—which is conceded to be a security—from the eventual delivery of tokens, which are argued to be non-securities once they are usable and decentralised. This segmentation allows developers to solicit funding without prematurely launching or promoting the token itself, thus reducing the risk of falling foul of regulatory restrictions.

3. Investor protections

Since the SAFT is a contract governed by securities law, investors benefit from certain protections, including disclosure of risk factors, potential restrictions on resale, and timelines for token delivery. Moreover, SAFT agreements often include mechanisms to refund investors should the project fail to meet specified development milestones.

4. Transparency and due diligence

Projects that choose to raise funds using a SAFT typically work to foster transparency with investors. The terms of the agreement are usually thorough and legally vetted, outlining clear milestones, funds usage, and delivery schedules for the tokens.

5. Token generation event (TGE)

Upon reaching a predefined stage in development—commonly referred to as the Token Generation Event (TGE)—the project mints the digital tokens and distributes them to investors in accordance with the terms of the SAFT. At this point, the tokens are meant to be functional and usable within the ecosystem, supporting the argument that they are no longer securities in the traditional sense.

6. Usage in different jurisdictions

Although the SAFT was created primarily in response to U.S. securities regulations, it has also seen adoption in several other jurisdictions. That said, compliance strategies may vary across regions, and developers usually consult legal specialists to localise the SAFT or ensure it aligns with relevant laws.

In summary, the use of a SAFT in token funding allows blockchain projects to raise capital lawfully and responsibly while providing investors with well-documented rights to future tokens under regulated conditions. It has thus become an important tool in token fundraising strategies.

Advantages and limitations of SAFT

While the SAFT framework provides a legally conscious approach to token-based financing, it is not without its complexities and criticisms. Understanding the advantages and limitations of SAFTs is key for startups, investors, and legal professionals navigating token funding.

Advantages of SAFTs

• Regulatory alignment: SAFTs strive to comply with securities laws during the initial fundraising stage, reducing legal risks during early development.
• Separate security from utility: The architecture of a SAFT attempts to delineate between investment contracts and the final utility token, a distinction helpful for regulatory clarity.
• Investor confidence: Accredited, institutional investors are more inclined to engage with projects that present a structured legal agreement, particularly those that provide transparent timelines and protections.
• Promotes innovation: For blockchain developers, SAFTs allow early fundraising without immediately exposing them to the complexities of token market compliance.
• Facilitates responsible token launches: Via phased rollouts and milestone-driven deployments, SAFTs encourage projects to deliver functional technology before distributing tokens.

Limitations and Challenges

• Exclusion of retail investors: Because SAFT sales often restrict participation to accredited investors, many retail participants are excluded from early-stage opportunities.
• Regulatory ambiguity: Despite best intentions, the SAFT model does not guarantee exemption from securities regulations post-token launch. Regulators such as the SEC have taken differing views based on a token’s practical use and decentralisation.
• Uncertain token fate: Investors may face uncertainty regarding the viability of the project. Should the token not materialise or the product not come to fruition, there is a risk of financial loss, even within a legal contractual agreement.
• Lack of standardisation: The decentralised ecosystem has led to inconsistent SAFT templates and varied interpretations, which can introduce legal complexities or discrepancies in investor expectations.
• Limited applicability: The SAFT framework is designed with U.S. securities law in mind, but not all jurisdictions may recognise or support the same structures or assumptions embedded in the model.

Understanding both the strengths and drawbacks of the SAFT model is essential for stakeholders looking to engage in token funding responsibly. Projects should not view SAFTs as a one-size-fits-all solution but rather a starting point in a broader compliance and investor protection strategy.

In an environment where legal interpretations and technical standards are continually evolving, the SAFT remains a pivotal but not infallible tool in the arsenal of cryptocurrency startups. Ongoing legal development, industry best practices, and regulatory guidance will shape its future utility.