What is “SAFT”?
1. What is “SAFT”?
"SAFT" (from the English Simple agreement for future tokens) is a contractual investment agreement that refers at a technological ("low", i.e. such as in the code) level to the exchange of statements of intent regarding the agreement of specific investors to finance blockchain projects, with developers offering them discounted crypto tokens in return as a future event.
In this context, a "SAFT" contractual arrangement may qualify as a type of electronic bearer security and should fall within the scope of the provisions of the Public Offering of Securities Act. However, the tokens transferred from the blockchain developers to the investors, according to the “SAFT” agreement, are not securities. Therefore, they do not fall within the scope of the Bulgarian regulations on securities or electronic money companies, which are subject to the regulations of the Law on Payment Services and Payment Systems (ZPUPS) and the bylaws of the BNB licensing such companies (argument from Bulgarian Regulation No. 16 of the Bulgarian National Bank(BNB) of March 29, 2018 for the issuance of licenses and approvals, for entry in the register under Article 19 of the Federal Law on Public Procurement).
All that facilitates the legal regime of the "SAFT" agreement is due to the fact that investors should be explicitly allowed to fund a specific project of the crypto-developers, in exchange for the "depreciated" (or at least initially cheaper) crypto-tokens as a future event . This means that accredited or "authorized" investors are natural or legal persons who have acquired the right to trade certain restricted, highly regulated securities - "futures" (such as "SAFT"), based on certain parameters and subject to the will of the developers as the final financial result. In this case, there is a so-called internal legal relationship between the two parties, which has no effect vis-à-vis third parties and does not simply represent a spontaneous, public offering of future shares, tokens or electronic money, as is observed in most ICOs in the pre-sale phase ( from English "presale"). This fundamentally changes the 'SAFT' regulatory and licensing regime, effectively easing it to none.
2. How should start-up companies working with the "SAFT" concept be legally formed?
From this point of view, the company that offers investments in "SAFT" does not necessarily have to be a joint-stock company, as is the requirement for companies operating with electronic money, in order for the latter to obtain a license from the BNB. This means that a startup operating under the "SAFT" concept can be any Bulgarian firms as OOD or EOOD. Additional licensing according to the ZPUPS or according to Ordinance No. 16 of the BNB of March 29, 2018 for issuing licenses and approvals of electronic money companies is not required. It is also not necessary to announce a prospectus, i.e. the public display of the accredited/authorized investors in the blockchain project operating and developing under the "SAFT" concept.
When an initial coin offering (from the English Initial coin offering "ICO") - the equivalent of the initial public offering of shares - is held, the tokens associated with the crypto project are not currently available as an electronic financial instrument, since the field of crypto equivalents of shares is not legally uniform internationally and is still subject to technological and legislative regulation.
Therefore, in order to regulate investment in crypto projects, licensing agreements such as "SAFT" are created with the aim of offering an investment tool instead of the actual tokens. Thus, "SAFT" provides a technological and legal option that a specific investor can take advantage of to participate with his capital in an already ongoing blockchain project.
3. What conditions should the authorized investors in a SAFT project meet ?
The "SAFT" agreement can only be concluded between a blockchain project developer and specific investors accredited by the first investor. Unlike traditional financial markets, the blockchain industry has a different financial logic that aims for security and transparency, but also speed of processes. From here comes the logic that investment projects related to the blockchain ecosystem are not or should not be so accessible to investors who do not meet specific conditions. In this line of thinking, most "SAFT" projects vet their investors beforehand, then set them specific legal thresholds and/or financial requirements they must meet to enter the project such as no liabilities, including convictions, level of income, bank guarantees, qualifications, experience, participations with investments in other crypto projects, etc. All this aims at the security of the project and security of the other participants in it from unwanted, side - let's call them indirect, financial and legal problems.
4. What does the actual composition of an o Forgiven Agreement for Future Tokens ( “ SAFT ” ) include ?
In order to arrive at a legally valid "SAFT" agreement, four crucial conditions must be present, which are:
- first - determination of the so-called "triggering events";
- second - determination of the so-called "valuation caps" (from English "valuation caps");
- third – negotiation of discounts;
- fourth – negotiation of proportional rights.
Not all "SAFT" agreements have the same parameters, which means that the agreed terms can make your investment sink or float depending on the experience of the entire blockchain project team, the functionality of the tokens at stake (the so-called "token economy" ), the distribution of issues of different types of investors relative to each other as the adequacy of their size, the accumulated capitalization during the presale (from the English "presale"), when the ICO itself is launched (if it comes to it at all), etc.
Here's what you need to know about each stage of the "SAFT" project:
4.1. Triggering events.
When an event is triggered, such as a sale of the company, an initial coin offering (ICO), or a merger, future tokens from the "SAFT" issue are converted into tokens . If the company goes bankrupt or the triggering events never occur, the "SAFT" agreement turns out to be a non-occurring legal outcome, which can also lead to the corresponding legal liability, if it is settled in the agreement.
The investor in the "SAFT" issue receives the same number of tokens as investors from the prospectus issue, i.e. the publicly announced investors, the former simply getting a better price initially, due to the risk of buying or backing the project earlier.
4.2. SAFT rating ceiling.
In the SAFT concept, the seed investor takes a significant risk in the early stages of the project, for which the valuation cap of the tokens provided to him is crucial. This criterion establishes a maximum value of the token issue of tokens relating to the "SAFT" agreement in order to create an objective criterion regarding the ownership of the particular investor. Without setting a cap on the valuation of each token, the percentage available to the investor in the "SAFT" issue would decrease as the value of the company increases, based on the realized revenues from the ICO, which form a separate issue of tokens - those of the investors under the prospectus. i.e. the received tokens in public sale.
4.3. Negotiating SAFT concessions.
The parties to the "SAFT" agreement agree on a percentage of the discount for the "SAFT" investor on the value of the tokens at the time of the triggering event, i.e. it is a discount from the expected price in the future. For example, if a discount of 80% is agreed upon initially, this means that the investor in the "SAFT" agreement receives his future tokens worth 80% of the price that the future investors in the ICO position will pay, as a reward for his earlier investment. I say again - the "SAFT" investor is not someone random - he is usually aware of the project, has been studied by the blockchain developers and is explicitly attracted as such due to some of his exceptional qualities such as personality, specialist, financial ability, history of participation in blockchain projects and etc., and sometimes all of these together.
4.4. The " Proportional rights " problem under " SAFT ".
The agreed-upon pro-rata rights allow the "SAFT" investor to participate in future fundraising rounds of the respective blockchain project . This problem should be approached with particular care by calculating a specific quota of the position and legally and technologically committing it to the "SAFT" agreement. Why? The excessive powers of the accredited investor of the "SAFT" position may at some point put the company in trouble with future ICO investors (for example) insisting that this token position should be sold only to them. This problem can be exacerbated if the company has granted pro rata rights to multiple SAFT investors who have rights to uncontrollably interfere financially and legally with the issuance of future token positions outside of the SAFT agreement. In my opinion, for this reason, "SAFT" investors should be clearly distinguished from other investors in the project and not be granted unlimited pro rata rights to purchase future positions of tokens from the same project, a condition that should really be included in the "SAFT" agreement.
Author: Mr.Atanas Kostov - blockchain attorney