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Bad News: SAFTs May Not Be “Compliant” After All

ICOs and simple agreements for future tokens

19 March 2018

Clifford Chance New York Partner David Felsenthal and Associate Jesse Overall have written an article for CrowdfundInsider.com. The article discusses heightened scrutiny of Initial Coin Offerings (ICOs) – particularly in connection with "simple agreements for future tokens," or SAFTs – by the United States Securities & Exchange Commission (SEC). For those who have encountered SAFT contracts but are less familiar with their mechanics, this article may serve as a useful introduction.

The Securities & Exchange Commission (SEC) has reportedly sent a wave of subpoenas and information requests to companies engaged in Initial Coin Offerings (ICOs). The SEC scrutiny is perhaps not surprising, given that, as Crowdfund Insider writes, “if you invest in an ICO, the play is to speculate on the price of the crypto once it is traded on a cryptocurrency exchange.” The Wall Street Journal has pointed out that SEC scrutiny has focused particularly on the use of “simple agreements for future tokens”, or SAFTs, a point which Coindesk confirmed, quoting a reportedly knowledgeable source, who stated: “The SEC is targeting SAFTs.” 

The irony is that SAFTs were created to reduce regulatory risk for ICO issuers, as reflected in the subtitle of the white paper introducing the SAFT concept, “Toward a Compliant Token Sale Framework”.4  Some of the largest ICOs of all time – such as the ongoing ICO of Telegram, which has so far raised $850 million, with a potential target of $2.5 billion5, and that of Filecoin in 2017, which raised $257 million6 – have utilized SAFT structures for precisely that reason.  This article identifies sources of legal and regulatory risk that both SAFT contracts as well as the “utility tokens” issued in their second stage may be securities under U.S. law. 

You can read the full article at: CrowdfundInsider.com