The enfant horrible of the digital token world, the Easy Settlement for Future Tokens, or SAFT, continues to seize headlines. Within the current Te
The enfant horrible of the digital token world, the Easy Settlement for Future Tokens, or SAFT, continues to seize headlines. Within the current Telegram case, the federal district court docket for the Southern District of New York enjoined Telegram Group Inc. from continuing with its long-planned token era occasion, discovering not solely that the issuance of their tokens, Telegram Open Community, would violate the registration necessities of the Securities Act of 1933 however that the preliminary placement of SAFTs constituted an unlawful unregistered providing of securities. On June 26, 2020, the court docket permitted a settlement between the US Securities and Trade Fee and Telegram that included an $18.5-million civil penalty, the return of some $1.22 billion to traders and a three-year requirement to inform the SEC earlier than issuing digital belongings. That settlement extinguished the attraction, leaving the choice as the ultimate authorized dedication. The SEC has made comparable arguments within the case of the Canadian startup Kik final 12 months. Nonetheless, billions of {dollars} of SAFTs have been issued by different issuers of which many stay excellent and are topic to potential secondary market buying and selling.
Though there have been variations, in a quintessential SAFT providing, an issuer raises funds to finance the event of a platform that can be pushed by tokens by promoting to traders a SAFT that represents the suitable to obtain an allotment of tokens as soon as the platform is launched. The acquisition value is paid upon receipt of the SAFT, and the variety of tokens to be delivered in settlement is set on the date of the token era occasion, normally at a reduction to the general public buy value. For a lot of issuers, quite a few delays in launching the platform have induced SAFT holders to search for pre-launch exits, and as anticipated launch dates strategy, different traders search for methods of shopping for tokens at discounted costs. Thus, there’s a pure provide and demand for secondary transfers of SAFTs. Nevertheless, such secondary gross sales are difficult by plenty of contractual and regulatory elements, that are mentioned in flip beneath.
Secondary gross sales of SAFTs vs. secondary ahead contracts
Most SAFTs are topic to contractual switch restrictions that prohibit the task of the SAFT contract or any rights thereunder to a 3rd celebration with out the prior written consent of the issuer. Whereas it might be possible to accumulate the issuer’s consent to switch a SAFT, many SAFT holders might really feel constrained by relationship issues from signaling to the issuer that they’re in search of to exit their funding. Equally, SAFT issuers could also be disinclined from consenting to such transfers to keep away from: (1) any implication that they’re encouraging the expansion of a secondary market; (2) the complexities of policing switch restrictions; and (3) the price of reviewing and approving transfers, and should solely comply with transfers to associates. Some switch restrictions comprise exceptions for partnerships or funds that want to distribute belongings professional rata to their companions or traders. To the extent such entities have been the preliminary traders in a SAFT, distributions to their traders, whether or not outdated or new, could also be doable inside the contractual restrictions.
Alternatively, SAFT holders might acquire liquidity by coming into right into a ahead contract with a secondary investor for the tokens underlying the SAFT — a “secondary ahead contract.” Whether or not this strategy is permissible or not relies upon largely on how strict the switch restrictions are outlined within the SAFT. Questions that might have to be answered embody, however should not restricted to: (1) Do the switch restrictions apply to transfers of the underlying tokens or solely the SAFT itself? and (2) Do the switch restrictions embody oblique transfers or transfers of the financial rights underneath a SAFT? Assuming counsel can get comfy {that a} secondary ahead contract is permissible underneath the SAFT’s switch restrictions, plenty of troublesome regulatory points then come up.
Regulatory points with secondary ahead contracts
A secondary ahead contract may be understood as a bodily settled contingent pay as you go ahead contract obligating the vendor to ship sure tokens, if and when issued, to the client in trade for the cost of an upfront buy value. The regulatory remedy of such a pay as you go ahead contract will rely largely on the authorized characterization of the underlying tokens: Are they securities, commodities or “one thing else?”
Tokens as securities
Whether or not a digital token is a safety underneath the U.S. securities legal guidelines has been the central subject going through preliminary coin choices and SAFTs since inception and has been the first topic of many court docket instances and regulatory writings, together with the SEC’s Report of Investigation on the DAO, quite a few SEC enforcement actions and the SEC’s Framework for “Funding Contract” Evaluation of Digital Belongings. The authorized evaluation…