In the crypto world, ICOs are big money. In total, they have brought in $20 billion of funding. But, many are closed to U.S. investors because the SEC has called them securities, which is bad news. To get around this problem, a whole host of new funding models have been created. One of those is the SAFT, which we take a look at in more detail below.
What is a SAFT?
SAFT stands for Simple Agreement for Future Tokens.
It is a promise for future tokens. The main difference is that the tokens are not delivered immediately, like in most ICOs.
Did you know?
Over 60 companies have raised more than $564 million using this method.
Why is it better?
SAFT offers several benefits:
- Token delay - It reduces the expectation of future value, a key aspect of any security.
- Fundraise - It still allows for the widespread collection of money.
- Open market - It should allow funds to be raised from U.S. investors.
But before we get to that, first we need to explain what securities are and why they're related to fundraising in crypto.
Did you know?
Intangible Labs raised $125 million through a SAFT from 225 investors in March and April 2018. This is to fund a new stablecoin called Basis.
What are securities?
To be deemed a security, a token must fit the following criteria:
- There must be an investment of money.
- There is an expectation of profits from the investment.
- Money is pooled together.
- Profits come from the efforts of a third party.
The SEC chairman Jay Clayton has called all ICOs securities. The SEC has clarified that Bitcoin is not a security and that Ethereum is not a security, even though it had an ICO. This is because they are significantly decentralized.
Did you know?
The SEC set up a fake website offering “Howey coins” only to inform investors that they should do more research before investing. The name is a reference to the “Howey test,” used to determine if something is a security.
Why are ICOs deemed securities?
ICOs clearly meet two of the main points, as there has been an investment of money which is pooled together. It is also quite likely that a lot of people getting involved are hoping to make money out of buying coins.
The fourth point is the most contentious. ICOs are often created and managed by decentralized organizations. This means there is no one person or company responsible for promoting the token. However, concerns have been raised over XRP, a token which has had an ICO and is promoted by a private company called Ripple.
I believe a token once offered in a security offering can, depending on the circumstances, later be offered in a non-securities transaction,” SEC commissioner William Hinman.
Why might SAFTs not be the answer?
There are several concerns regarding SAFT:
- A promise - Tokens may never get delivered, whereas in an ICO they are usually received immediately.
- The unknown - The SEC may still class them as securities. It is still unregulated and risky to perform one in the U.S. and other countries.
What alternatives are out there?
- An STO - A security token offering. This is a regulated ICO that complies with the SEC and security regulations. It makes some big requirements for the issuance of coins.
- Airdrop - Give your tokens out for free. Problem is, this won’t raise much money.
- No ICO - It might just be safer to seek conventional funding and avoid the risks of running an ICO. Neither Bitcoin or Litecoin had an ICO, and they’re doing pretty well.
We've done a whole guide on alternative funding mechanisms.
”To participate in a Security Token Offering is very similar to participating in an ICO. You can purchase tokens during the offering that you can then trade, sell, or hold,” Polymath.
ICOs and related ways of raising money for cryptocurrencies are controversial because they operate in undiscovered legal lands. The SEC may start providing guidelines which would go a long way to highlight the right way to raise funds. Until then, SAFT claims to be a safer way of raising funds. But has it taken off? Not really.