Those familiar with the world of cryptocurrency and blockchain will no doubt be aware of ICOs.
Emerging to much fanfare in 2013, ICOs have proven insanely popular with many crypto startups, providing an avenue to raise funds that didn’t involve having to go down the more traditional route of working with a VC (venture capitalist) or a conventional bank.
With an ICO the founders of a crypto startup could raise money without diluting their own shares in the company.
The problem with ICOs is that literally anyone with a whitepaper, a slick-looking website, and an idea could launch one and begin raising funds.
A damning study by ICO advisory firm States Group concluded that around 80 percent of ICOs carried out in 2017 were complete scams.
Throw in confusion over governmental regulation, with regulators themselves admitting that ICOs can begin life as a security and transform into another asset type down the line, and it’s easy to see why the ICO craze has quickly dropped off.
Enter the Simple Agreement for Future Tokens, also known as SAFT.
A SAFT agreement essentially allows investors to avoid the confusion that we’ve seen over the classification of ICOs.
One of the primary issues that startups have is being able to issue utility tokens before a network is functional, as this process could be classified as dealing in securities, which could lead to legal issues for investors down the line.
It’s illegal under Section 5 of the Securities Act 1933 for companies to issue securities that haven’t been registered with the revenant authorities, with criminal penalties that could include up to 5 years in federal prison.
SAFT is “probably the best that we have today”
A SAFT framework is geared towards resolving those uncertainties posed by ICOs, providing a certain level of certainty to both investor and issuer.
Thomas Koller heads up a startup who have decided to go down the SAFT route rather than look at a more traditional ICO;
“When looking at ways to fund Atronocom, I naturally looked initially at an ICO, but it wasn’t long before I realized that a SAFT was a more suitable avenue to take my company down,” commented Koller.
It would seem that he’s not alone in that line of thinking.
The Wall Street Journal reported that some 60 companies had raised somewhere in the region of $560 million by late last year, attracting the interest of companies like photo giant Kodak, who announced plans to raise $50 million via a SAFT token sale.
Marco Santori, known as “the godfather of crypto law” is responsible for the SAFT whitepaper, which has shown the way forward for the likes of Thomas Koller at Atronocom, and while speaking to Bitcoin Magazine in an interview last year he commented that he believes “that the SAFT framework is probably the best that we have today.”
“If you layer on top of that the additional clarity that the SEC has provided in the context of Bill Hinman’s speech or the so-called ‘Hinman test’ that incorporated the SAFT framework, then you’ve got a pretty complete picture.”
One of the most talked about benefits of SAFT agreements, particularly in the United States, is the potential it unleashes for US-based blockchain projects to come to the fore.
In the past the regulatory uncertainty caused many promising startups to opt out of starting up in the US and to take their business overseas to financially neutral territory such as Hong Kong.
“What a SAFT agreement provides over an ICO is an increase in clarity when it comes to securities law and taxation not just for the company, but also for the investor,” concluded Koller.
“It provides a certain peace of mind that ICOs simply cannot offer today.”
While the long-term future of SAFT agreements is no more set in stone than any other fundraising avenue, it’s undoubtedly offering those who would have had little choice but to risk an ICO another avenue to explore, and that can only be a good thing.