The Days of SAFT Are Over

If you read some of the recent SEC bulletins and confirmation that a flurry of SEC subpoenas were sent to companies, operators and possibly attorneys, that were involved with Initial Coin Offerings (ICOs), you will agree that something needs to change.

The Simple Agreement for Future Tokens (SAFT) was invented in Silicon Valley, and later adopted and improved by Marco Santori, who was formerly a top partner at Cooley. SAFT was positioned as the answer to a unique question: how do you best sell utility tokens when those tokens do not yet exist? Most utility tokens that ICOs sold investors did not even have their service in place, which in essence amounted to pre-selling a service by issuing an ERC-20 token. For context, this takes just 2 hours to code.

The idea behind SAFT was simple: issue a token that has only simple utility: to trade on exchanges. Then later, that token will be replaced with the promised utility token, which would be used for the proposed service. It turns out, this option is a security and the top minds of the marketplace realized they needed something else. Here comes the SAFT, which is also a sweet drink in German, to save ICOs. Not so fast.

The most famous SAFT offering is Filecoin, who issued over $200M in SAFT agreements to investors on CoinList. Filecoin was willing to concede that the SAFT is a security, but the eventual token, they insisted, was a utility. I wrote an article last November called the Great SAFT Magic Trick to alert the marketplace that it is not that simple to accept the idea that a security, the SAFT, will become a utility just because.

It should have been clear to Filecoin, and the other ICOs who used a SAFT, that their future token will be a security token. Of course, this means that the token will only trade on broker-dealer’s ATS platforms, such as tZERO, StartEngine Secondary, and Templum, among others, as well as on registered exchanges. I know this is a sad outcome for investors who were hoping to trade these tokens on the so-called “exchanges” for 5X their investment, but this is the way the game works. Violate the SEC rules and see how the story ends.

There is no reason to use a SAFT if the end result is going to be a security token. There must be a better way. Enter the RATE, a Real Agreement for Tokens and Equity. This new agreement solves the problem altogether by issuing two security tokens.

The first one is an equity token, which can be common shares or preferred with dividends. This token is issued by the company as equity and sits on the capital table. The shareholders of the company will vote on the authorization of the equity tokens, and then the board of directors will write a resolution to sell those tokens. This solves many issues with utility tokens, including governance and voting rights to protect investors. It is analogous to adding a token to a share of stock. A company can also issue a preferred token with a revenue share based on the company’s net revenue.

The second token is the one that will eventually be used to perform the proposed service on the blockchain. This token does not need to exist at the time of the offering. It can be promised with conditions, such as “if and when the token is available,” and it can be considered a perk to the offering. This is important because it means the entire value lies with the equity token because it is not yet clear what value of the utility token will be or even if it will ever be created.

The real question is this: is the second token a utility token or a security token? This depends on may factors, including whether the token will find its way onto an exchange. If it does, then it is a security token. Another example is if a token has an unlimited ability to be issued by the company and does not trade anywhere and can solely be used for the blockchain service, it is a utility token.

The RATE can solve many of the anxieties companies have when venturing into the ICO world. It offers the right protection and value creation for the investors, and it also provides them with a perk (the utility token) for being early investors.