Back in June we talked about our take on security versus utility tokens. If you missed it, you can read that post here. Now we're taking a look at Simple Agreements for Future Tokens (SAFTs) as a way for issuers to structure their offerings.
What is a SAFT?
Put simply, a SAFT (Simple Agreement for Future Tokens) is a promise to provide future tokens at a fixed price. A SAFT may be structured to grant the purchaser the right to receive certain shares of a company's capital stock, represented by entries in a distributed electronic network or database maintained by or on behalf of the issuer.
- Step 1: "The purchaser agrees to contribute money in exchange for a right to receive tokens at a future date. At the time of purchase, no token is delivered. In this first step, there is generally a distribution of a security, specifically the right to a future token, which is often made under a prospectus exemption, such as the accredited investor exemption."
- Step 2: "The token is delivered. At that time, the issuer has generally represented that the software, online platform or application is built or the goods or services are available and the token is functional. In several instances, issuers have taken the position that the token itself is not a security."
The SAFT may be issued under a prospectus exemption, as a security. An issuer may consider relying on the accredited investor exemption and/or the offering memorandum exemption provided in National Instrument 45-106 Prospectus Exemptions. However, purchasers and issuers must be aware of the resale restrictions noted in National Instrument 45-102 Resale of Securities.
Value of the SAFT:
Some companies see this as an avenue to give investors the opportunity to invest in equity ownership of a privately held company using cryptocurrency. Companies envision the tokens sold with SAFTs being listed on an alternative trading system, creating a liquid security and providing companies with an alternative to a traditional IPO.
Terms we have seen:
If there is a crypto offering, the SAFT will automatically convert into the right to receive a number of Tokens equal to the amount paid for the SAFT divided by the conversion price, rounded down to the nearest whole token.
The Tokens, if issued, will be digital securities that have the same rights, preferences, and privileges as traditional securities of the same class of capital stock, but will settle differently than traditional securities. The Tokens, if issued, will be uncertificated, and the ownership and transfer of the Tokens will be recorded on a distributed ledger.
If there is not a crypto offering, change of control, or dissolution event on or before the deadline, the purchaser will receive a number of conversion shares equal to the purchase amount divided by the fixed conversion price.
TLDR (too long didn't read)
SAFTs provide a way for issuers to raise capital before a token offering. Issuers should be aware of the prospectus requirements that the SAFT is subject to and proceed accordingly.