ICOs — Initial Coin Offerings — have become a familiar phenomenon in the crypto community. Coinmarketcap lists more than 79 completed and ongoing ICOs, and over 700 unique coins. Blockchain entrepreneurs used ICOs to raise a total of nearly $500 mln over the past two years.
What, then, is SAFT? And how is it related to ICOs?
The Simple Agreement for Future Tokens is actually a type of investment contract, developed by Protocol Labs to work with their platform CoinList. The reasoning behind the creation of these tools has to do with US securities laws.
ICOs are infamous for not being regulated by any financial authority such as the Securities Exchange Commission. Although similar in name and concept to IPOs — Initial Public Offerings — ICOs would be more accurately described as crowdsales, and can frequently turn out to be fraudulent.
That being said, whether an ICO is subject to financial regulations depends on whether tokens are officially determined to be securities, which they haven’t been so far.
Not all ICOs are the same. If the company is distributing tokens after having completed development, those coins are less likely to be considered a security. However, if the company is fundraising ahead of development with the intention to distribute tokens to investors in the future, then it’s a token presale which can be seen as a securities sale.
In such cases, to avoid securities restrictions and regulations, companies have resorted to incorporating outside the US and excluding US investors. Otherwise, a company needs to face the complications of complying with US securities laws.
Such contracts like SAFT can help facilitate compliance with US securities regulation and enable companies to include US investors in token presales. SAFT is modeled on the YC Simple Agreement for Future Equity (SAFE), a contract widely used by startups for angel and seed investments. SAFT is available to download for use outside of the CoinList platform. Thus, regulation compliance and token sales are facilitated, allowing technology companies to develop innovative products and investors to support them with confidence.