INTRODUCTION
Though Initial Public Offerings (IPOs) have been in existence for many years, the first Initial Coin Offering (ICO) was held in 2013, ever since then, the technique has boomed especially in recent years. According to UK Business Insider, ICOs raised over $5.6 billion since in 2017, and so far, over $6.3 have been raised this year. This has increased concerns about how well companies that use ICOs for fundraising are being vetted and how well the public is being informed about the process.
Infact, SAFTs are venture capital's way of adapting to the boom in ICOs. ICOs are similar to initial public offerings, or IPOs, in that they are a way for companies to raise money from the public. In an IPO, a company sells stock, or ownership stakes, to the public; in an ICO, a company sells its tokens.
WHAT IS SAFT?
Simple Agreement for Future Tokens. SAFT is the commercial instrument used to convey rights in tokens prior to the development of the tokens’ functionality. For Instance, in Switzerland, the SAFT itself is a security, so it could be offered in a private placement to accredited investors.
The tokens that are ultimately delivered to the investors, though, should be fully-functional, and therefore not securities under Swiss law. Outside of the country, the need to limit SAFTs or tokens to accredited investors will depend upon the laws of the local jurisdiction.
SWISS FINANCIAL REGULATION FOR ICOs
Due to the rising number of ICOs, the need for some kind of regulation can not be over emphasized. To this end, FINMA (Financial Market Supervisory Authority) published a revised set of guidelines that will govern token sale events. Read more HERE
FINMA's principles focus on the function and transferability of tokens
Acccording to the new regulations, In assessing ICOs, FINMA will focus on the economic function and purpose of the tokens (i.e. the blockchain-based units) issued by the ICO organiser. The key factors are the underlying purpose of the tokens and whether they are already tradeable or transferable. At present, there is no generally recognised terminology for the classification of tokens either in Switzerland or internationally. FINMA categorises tokens into three types, but hybrid forms are possible:
Payment tokens
These are synonymous with cryptocurrencies and have no further functions or links to other development projects. Tokens may in some cases only develop the necessary functionality and become accepted as a means of payment over a period of time. For ICOs where the token is intended to function as a means of payment and can already be transferred, FINMA will require compliance with anti-money laundering regulations. FINMA will not, however, treat such tokens as securities.
Utility tokens
These are tokens which are intended to provide digital access to an application or service. If a utility token functions solely or partially as an investment in economic terms, FINMA will treat such tokens as securities (i.e. in the same way as asset tokens.
Asset tokens
These represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives. FINMA regards asset tokens as securities, which means that there are securities law requirements for trading in such tokens, as well as civil law requirements under the Swiss Code of Obligations (e.g. prospectus requirements).
Under the new guidelines, Securities regulation is intended to ensure that market participants can base their decisions about investments on a reliable minimum set of information. Moreover, trading should be fair, reliable and offer efficient price formation.
SAFT AND TRADITIONAL VENTURE CAPITALS
In traditional venture capital investing, investors give a startup money in exchange for an ownership stake in the company. But with SAFTs, venture capitalists receive the rights to future tokens instead. Typically, in the agreement, the VCs get the rights to a certain portion of the tokens a company issues in an ICO.
With SAFTs, venture capitalists are investing in a company's technology rather than in the company itself.
With traditional equity investments, VCs have a stake in the success of the startup they are investing in. But with SAFTs, the VCs are much more concerned about the success of the underlying technology.
It's a subtle distinction, but an important one. A SAFT pay off for an investor if a token becomes valuable - even if the organization that created the token is a non-profit, a loose affiliation of programmers, or even potentially a for-profit company that goes out of business.
A good case study is Bitcoin. The protocol behind the popular cryptocurrency was created by an anonymous programmer or group of programmers under the moniker Satoshi Nakamoto. Bitcoin has become extremely valuable even though there's no single company behind it.
LOCK UP
Lock up period is the agreed time frame signed in SAFT by both parties regarding when the token will be released to the early investors. When the lock-up period ends, investors may redeem their tokens according to a set schedule, often quarterly. They normally must give a 30- to 90-day notice so that the fund manager may liquidate underlying securities which allow for payment of the investors.
MECHANISM OF SAFT
SAFT architecture seeks to solve the uncertainty for both investors and issuer. If tokens are sold with the believe that they will be a utility / commodity in the future, a SAFT contract can be created as a security sold to accredited investors. This was well analyzed by Argon group. Read more HERE
Basically, issuers and investors of a SAFT are consenting that at a later point, FINMA or the courts will determine that the tokens are not securities, while they might have been classified as such during ICO because the tokens had no real value then. At a high level, the SAFT looks like this:
The developer of a token-based decentralized network enters into a written agreement, called a SAFT, with accredited investors. The SAFT calls for investors to pay money to the developer in exchange for a right to discounted tokens once the network is completed and SAFT filed with FINMA.
Funds from the investors are used by the developers to build thr platform. This could take months or years. Still no pre-functional tokens are issued.
Upon platform completion and the network’s basic functionality exists, the developer creates the tokens and delivers them to the investors, who can sell tokens to the public on the open market to realize their profit. The developers themselves can also sell tokens to the public at this point as it is now a consumptive use-token.
SAFT WHITEPAPER
For over 6 decades, Venture capitals have been guided by a set of best practices developed by people in the industry through trial and error. But SAFTs are so new - the first formal white paper on them was released on October 2017 - that there aren't any rules about how they should go. Download SAFT Whitepaper And FULL SWISS ICO GUIDELINES
SOME LIMITATIONS OF SAFT
SAFT only works for utility tokens and not security tokens
SAFT approach also has the unfortunate effect of excluding the general public from participation, as only accredited investors could part-take in the first part of token sale.
The SAFT framework is focused on bodies of Swiss Law and not generally applicable worldwide, it can very well be deemed as an illegal practice in other jurisdictions, potentially excluding many international contributions.
SAFT: MERITS and DEMERITS
Benefits
SAFT contracts could be used to create a standard for token sales that would be compliant with FINMA laws. Should the industry adopt this standardized framework for conducting token sales, then the ICO sector could continue to flourish and innovative new projects could receive much-needed funding.
Furthermore, the number of ICO scams that have plagued the sector would be heavily reduced as all projects that use the SAFT framework would be subject to regulatory scrutiny before their token sales launches.
ICO investments would become safe for the public as they can only purchase the new token once the project has been completed and has a functional product. The accredited investors would be taking on more risk but are also rewarded for that risk with a discount on the issue price.
Downsides
Only accredited investors could invest, which means small private investors could not receive the full potential financial benefits of investing in an early-stage startup.
**SAFT framework only works for utility tokens. If a digital token is simply a tokenized security, it will still fall under laws of a specific juricsdiction.
In conclusion, Its still early days in SAFT contracts implementation for token sale involving both parties, because ultimately the market will determine its acceptance and value, though FINMA has come in strong with guidelines, it's still unclear, if investors will be protected when the startups they invest in don't succeed in building their promised platforms.
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