Initial Coin Offerings (ICO) are disrupting traditional financing models, because they are a very attractive way to raise money without being subject to the restrictions of the latter. The legal structure of ICOs is still subject of lively discussions though and there is an increasing need for a form of ICO compliance if start-ups want to demonstrate the legitamicy of their projects. Since it borrows characteristics from more traditional mechanisms like IPOs and Crowdfunding, it’s only logical that the legal foundations could be built on existing models without reinventing the wheel and one of those proposals is the Simple Agreement for Future Tokens (SAFT).
The world of traditional financing is turned upside down and we’re experiencing an unseen disruption thanks to new forms of fundraising like ICOs. The 20 biggest ICOs have raised more than $320million and all of them have taken place in the last 18 months. Considering the large sums at stake and the relatively lack of legal and regulatory frameworks, it isn’t surprising that many critics point to the high risk of investing in such operations. Given that the issuer in an ICO does not have any comparable legal obligations to the investor as in a regular financial instrument like a share sale, it would be easy to believe that there is little from keeping them of simply disappearing with the raised funds. Naturally, there is, a lively discussion going on about the right legal structure of these fundraisings and since an ICO is – to an extent – shares similarities with more traditional mechanisms like IPOs and Crowdfunding, it’s only logical that the legal foundations could be built on existing models without reinventing the wheel. One of those proposals is the Simple Agreement for Future Tokens (SAFT). It is based on the simple agreement for future equity (SAFE), which was developed by the Californian law firm Orrick and the Silicon Valley based accelerator Y Combinator to provide for an alternative to convertible notes, which are predominant in start-up financing. A SAFE is is not a debt instrument unlike a convertible note and therefore does not have maturity dates, isn’t subject security regulations, nor creates it the threat of insolvency. It doesn’t accrue any interest a start-up would need to worry about and aims to be a straightforward document to simplify negotiations. It is an agreement between an investor and a startup that provides warrants to the investor for equity in the company without determining a specific price per share at the time of the investment. Instead, the SAFE investor receives the futures shares once a priced round of investment or a specific liquidation event occurs.
Token sales equally seek to avoid being considered as financial securities, do not envision any form of direct financial compensation such as coupon payments of bonds, and don’t contain a legal claim that in the case of not being satisfied could lead to bankruptcy. Thus, why not build on the work done Orrick and Y Combinator? That must be exactly what the people behind Coinlist must have thought. Coinlist is a joint venture between AngelList, the start-up and investor platform, and ProtocolLabs, the company that builds infrastructure for decentralized networks.
Coinlist describes a SAFT as “a legal framework and standard for coinsales in the United States”, notorious for its securities laws and the implications it could have on Blockchain start-ups. It is intended to be the default agreement for investments on CoinList. However, it is open-source and free for all to use off of the platform as well, so it can be easily adapted by anyone who is interested.
Other companies follow suit, take Colony, for instance: It wants to create a social collaboration platform that makes it easy for people all over the world to build companies together online. In order to do, it needed to raise money. Fully aware of the legal expenses it would require when done properly they, too, turned to the SAFE and drafted an agreement which would entitle those from whom we raised capital tokens at a modest discount if we held a token sale, or equity at the same discount if the company instead raised venture capital. According to its founder, this agreement enabled them “to raise several rounds of funding, under the same terms without undertaking additional onerous paperwork, simply by demonstrating Colony’s consistent progress and operational excellence.” (For more details on the SAFTE, Colony’s Simple Agreement for Future Tokens or Equity, see here)
Both examples show though the importance of a sound legal framework that goes beyond the promises of a quickly drafted whitepaper. Otherwise, projects might not only risk being caught up if the ICO bubble bursts as predicted by its critics, but to miss out entirely in a market of increasing competition. In any case, it shows that raising money in the wild west of blockchain financing can be do responsibly and with the investor in mind.