That same year, Kik Interactive, a Canadian mobile messaging startup, raised $50 million after filing with the SEC and selling SAFT securities to accredited investors. However, when the same company launched its second round of funding a month later, it did not do so through SAFT agreements and instead sold digital tokens that could serve as a utility for its service. The company argued that the tokens were no longer an investment. Now, two years later, Kik faces an SEC complaint about an « unregistered $100 million ICO. » This shows why more and more crypto projects are turning to SAFT to raise funds – everything else seems to mean legal successes on the street. In the United States, unlike ICOs, SAFTs are limited to accredited investors, which means that cryptoprojects cannot conduct public fundraising at an early stage with private investors. An accredited investor is a person legally entitled to trade in securities, depending on whether he or she meets a number of requirements regarding income, net assets, professional experience, etc. A SAFT is a form of investment contract. They were created to help new cryptocurrency companies raise funds without violating financial rules, especially the rules governing when an investment is considered a security. Saft is the business tool used to transfer rights to tokens before the development of token functionality. In the United States, the SAFT is itself a security, so it could be offered to accredited investors as part of a private placement. However, the tokens that will eventually be delivered to investors should be fully operational and, therefore, not have securities under U.S. law. Outside the United States, the need to limit SAFT or tokens to accredited investors depends on the laws of the local jurisdiction.
Instant messaging platform Telegram is currently facing its own saga with the SEC regarding its 2018 ICO, also carried out via SAFT contracts. The speed at which cryptocurrencies have grown has far exceeded the speed at which regulators have tackled legal issues. It wasn`t until 2017 that the Securities and Exchange Commission (SEC) provided essential guidance as to when the sale of an initial coin offering (ICO) or other tokens is considered the sale of a security. The supply and total volume of stablecoins has increased lately – all the more so. A SAFT is considered a security, because until the tokens are created and unlocked, investors invest their money in a company that expects these tokens to be sold at a higher price once the project has gone through more development. This meets the most basic definition of a security: investing in a company that expects future profits. When a company sells a SAFT to an investor, it accepts that investor`s money, sells, offers, or exchanges coins or tokens. Instead, the investor receives documents attesting that the investor has access to the creation of a cryptocurrency or other product. Obtaining funds through the sale of digital currency requires more than building a blockchain. Investors want to know what they have embarked on, that the currency is viable and that it is legally protected. Since 2013, hundreds of developers have used token sales to secure funding from startups around the world. Meanwhile, network developers and potential investors have tempered under a cloud of legal uncertainty.
Did these public auctions give rise to unregistered securities? Did the sellers participate in the money transfer? How would sales be taxed? So far, the thinking in the SAFT whitepaper project has been limited to a few U.S. laws….