What Is a Simple Agreement for Future Tokens (SAFT) in Crypto?

What Is a Simple Agreement for Future Tokens (SAFT)?

A simple agreement for future tokens (SAFT) is an investment contract offered by cryptocurrency developers to accredited investors. Because SAFTs are considered a security instrument, they must be filed with the Securities and Exchange Commission.

Filing the contract does not register securities with the SEC; it merely announces that there is an agreement between the developers seeking funding and investors' capital in exchange for tokens when certain development conditions are met.

Understanding Simple Agreement for Future Tokens (SAFTs)

A SAFT is an investment contract. They were created as a way to help new cryptocurrency ventures raise money without breaking financial regulations, specifically, regulations that govern when an investment is considered a security. It's important to understand that the tokens are not issued or functional at the time the contract is signed. Investors receive their tokens after the issuer achieves specific goals.

When a company sells an investor a SAFT, it is accepting funds from that investor but does not transfer a coin or token. Instead, the investor receives documentation indicating that they will be given tokens if the project is successful.

Because cryptocurrency developers are unlikely to be well-versed in securities law and may not have access to financial and legal counsel, it can be easy for them to run afoul of regulations. The development of SAFT creates a simple, inexpensive framework that new ventures can use to raise funds while remaining legally compliant.

Components of an SAFT

SAFTs have specific language and definitions that must be included in each contract:

• Events: Occurrences listed in the contract that specify what triggers token distribution. Dissolution and termination events are also required to be included and actions defined.
• Definitions: There must be definitions for each term used in the contract, such as a dissolution event, discount price, discount rate, or any other terms that might be confused or interpreted differently.
• Company representations: The developers must state where they are licensed, their standing in that jurisdiction, and any powers and authorities they might have. Also, they must state their responsibilities under the contract and their understanding of how company rules and applicable laws govern the contract.
• Purchaser representations: The purchaser must acknowledge 1) their authority to agree to the contract, 2) that they meet the criteria to purchase the security, and 3) hold themselves responsible for the decision to do so.
• Miscellaneous: Any other conditions applicable to the contract, such as if the purchaser will receive any voting rights and dividends or if there are circumstances not governed by the contract.

Both parties must sign the contract, which is then submitted to the SEC, which posts it in EDGAR.

Simple Agreement for Future Tokens (SAFT) vs. Simple Agreement for Future Equity (SAFE)

A Simple Agreement for Future Equity (SAFE) allows investors who put cash into a startup to convert that stake into equity at a later date—as long as specific conditions are met. For example, the company that received funds from the investor might specify in the contract that it must achieve specific goals before it issues the equity.

SAFTs are the same—developers use funds raised from the SAFT to develop the network and technology required to create a functional token. They then provide these tokens to investors if conditions are met.

Just like an SAFE, an SAFT is a non-debt financial instrument. Those who invest in an SAFT face the possibility of losing their money and having no recourse if the venture fails. The contract only allows investors to take a financial stake in the venture, meaning that they are exposed to the same enterprise risk as if they had invested in an SAFE.

The Bottom Line

A Simple Agreement for Future Tokens is a contract between a blockchain developer and a buyer, who contributes a certain amount of capital for the promise of an equal amount of tokens when the project meets specific goals. An SAFT is similar to an SAFE, which is for equity.

SAFTs are generally only available to accredited investors (institutional investors or those with more than $1 million in net worth and more than $200,000 in annual income). They can be risky investments because there are no guarantees that the company developing the token will succeed and no way for the investor to recoup any losses.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.