ICOs in the United States are starting to use a nifty new financial instrument to help them clear up the mist the SEC left behind with its ambiguous policy on token sales.
The SEC is notorious for being unclear on which ICOs should be regulated as securities and which ones are simply “utility tokens” that don’t fall under its scrutiny.
This has often led to some confusion that some startups have been working on clearing up for a while.
The makeshift solution that popped up came in the form of Simple Agreements for Future Tokens (SAFTs).
Instead of navigating the murky regulatory territory of having a pre-sale that’s open to the public, ICOs use SAFTS as a way of promising future utility in the investment.
A SAFT is a new financial instrument that allows an ICO to offer tokens to accredited investors, placing a slightly risky bet on the idea that the tokens will have utility—and therefore won’t be securities—once the contract expires.
This is a nifty little way to get around the fact that most ICOs begin their sales with tokens that—from the outset, at least—would otherwise be classified as securities and therefore be regulated by the SEC.
According to some people familiar with the SEC’s inner workings, officials inside the organization are somewhat doubtful that SAFTs would give these companies a way around regulations.
“Since the SEC seems to think that most tokens are a security, that is going to lead them to a dramatically different conclusion than what the SAFT seems to want to have,” said Lee Schneider, a partner at McDermott, Will & Emery.
Schneider’s law firm works with clients in the token world but hesitates to present SAFTs as an option to them precisely for this reason.
However capable this instrument may be in helping ICOs circumvent SEC confusion for now, it still has its drawbacks.
For one, investors have no ability to trade the tokens that they buy before the SAFT contract expires. Secondly, the public can’t buy a single token, thus restricting the size of the market that an ICO can reach.
Despite the pitfalls, including the lack of a last work from the SEC, at least some startups see this as a proper model for acquiring the capital needed to fuel their products.