A Primer on ‘SAFTs’: What They Are and How They Work
At this point, nearly everyone in the cryptocurrency world knows what initial coin offerings (ICOs) are. However, many in the cryptosphere may not be familiar with other funding methods. Sure, there are plenty of traditional methods to raise funding by getting a loan, finding a wealthy patron to fund your project, etc. but what about other ways? Today we’re going to take a look at another funding method that doesn’t get nearly as much attention: SAFTs. Let’s break down what they are, how they work, and who can participate in them.
SAFTs: Simple Agreement for Future Tokens
An acronym for “Simple Agreement for Future Tokens,” SAFTs are another version of crowdfunding companies can use to raise funds. The method still involves raising funding from many sources like an ICO, rather than depending on one wealthy source. However, instead of doing an ICO with the public, SAFTs are aimed at larger players in the funding model.
The original point of an ICO was to allow everyone in the community to contribute, regardless of wealth. SAFTs are implemented to fit somewhere in the middle ground between individual contributions and funding from larger entities. Unlike an ICO, this type of funding method is for accredited investors and Venture Capitalists (VCs). VCs are able to contribute more financial support for specific projects. Additionally, this specific model of funding helps to solve the “is this a security?” issue many platforms run into with an ICO.
The SAFT model is built to be similar to another popular funding model: SAFE. Short for “Simple Agreement for Future Equity,” the SAFE model of funding allows those funding a project to contribute funding for equity in a company after it’s up and running. The introduction made investing simpler and faster for new companies. The cryptocurrency equivalent of that, the SAFT, allows that same type of model to be used in the crypto markets.
Security or Not?
One of the major reasons for introducing the SAFT in the cryptocurrency markets is to avoid classification as a “security” by regulators. During a regular ICO, contributors are typically receiving tokens and coins before the platform or network is up and running. Because of that, regulators may consider it to be a “security” in the eyes of the law. This is because investors are purchasing “tokens” that don’t have an actual use yet.
Until the platform or product is actually up and running, investors are just holding a “token” with no legitimate use-case. That may not be a big deal to investors since they know the platform is coming. However, Uncle Sam doesn’t exactly view it that way. With a SAFT approach, investors aren’t receiving anything in return until after the platform is up an running. The thought process is that then they won’t be considered securities since the tokens will serve an actual utility in the system. Before serving an actual purpose, investors are essentially holding equity (and a type of “security”) in the company.
With SAFTs, investors are contributing funding with the understanding that they’ll receive tokens once they serve a purpose. This the main reason this funding method began making its way to the crypto world.
Who Can Participate?
The last important distinction is in who can actually participate in the sale. Unlike ICOs, SAFTs are limited explicitly to accredited investors. Because of that, most of the casual American investors in the crypto markets are not able to participate in an SAFT offering.
In the US, an “accredited investor” is someone who can deal with securities that aren’t registered with regulators. Even if the SAFT arrangement later on does get classified as a security, then accredited investors are still safe.
In order to qualify as an ‘accredited investor‘ in the US, one needs to demonstrate a variety of things, including:
- Annual income of $200,000 (or $300,000 for a joint income)
- Have that income for the last two (2) years with an expectation of the same or higher for the upcoming year
- Have a personal net worth of $1 million or more (either individually or jointly with spouse)
There’s no doubt that some investors in the cryptosphere meet the requirements. However, substantially more people in the US interested in crypto do not meet the requirements. Keeping that in mind, it’s important to remember that SAFTs are not for everyone. But we hope that gives you some insight as to what’s going on with a SAFT. Even if you’re not able to participate now, that doesn’t mean you won’t have the opportunity to in the future!