Since 2013 when the initial token sale was launched the market for Initial Coin Offerings has largely been unregulated. Financial regulators have however begun issuing guidance regarding ICOs with many of them stating that most Initial Coin Offerings qualify to be categorized as securities and are thus subject to the laws governing securities. In order to stay in line with regulations a new kind of security has been formed with a view to aiding token sales in the United States without inviting the wrath of regulators. This kind of security is called SAFT agreement.
SAFT is an acronym for Simple Agreement for Future Tokens and can be traced to a SAFT project white paper written by Marco Santori, of Cooley LLP law firm and Juan Batiz-Bent and Jesse Clayburgh from software development firm Protocol Labs. The goal of the SAFT project is to serve as a forum where the regulatory framework for token sales that have been unveiled can be discussed with a view to creating an industry standard which offers protection to all the stakeholders who are taking part in the sale.
With a SAFT contract accredited investors are empowered to acquire SAFT contracts in the course of a token sale and then they will get the ICO?s digital tokens after the development of a utility token that is fully functional. In this regard it is similar to a Simple Agreement for Future Equity ? SAFE. The latter has increasingly become popular in the funding space of startups after it was pioneered by Y Combinator, a startup accelerator. With a SAFE contract an investor can invest their money in a startup but they will get their share once a specific event has happened and this could include the sale of a firm or another financing round.
By using SAFT contracts startups in the blockchain sector are able to conduct ICOs and target investors in the United States while staying fully compliant with the existing financial regulations and securities laws of the world?s largest economy. That is why some big names have taken the SAFT route when launching their Initial Coin Offerings.
Filecoin and Telegram
A good example of this is the Filecoin Initial Coin Offering which managed to raise more than $257 million to develop a decentralized cloud computing platform. Instant messaging app Telegram is also another example of a firm which used SAFT agreements in its bid to attract investments from the United States. Telegram reportedly managed to raise approximately $850 million during the pre-sale period.
Pros and cons
While SAFT contracts have advantages they also come with drawbacks. One of the advantages of these agreements is that they keep regulators at bay and thus letting startups raise funds for the development of services and products. SAFT agreements also offer investors a degree of security thus broadening the base from which a startup can pool funds from.
One of the drawbacks of SAFT agreements is they are limited to accredited investors. Small retail investors are thus marginalized in this regard and thus can only purchase the tokens from the secondary market at a later date.
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