A safe agreement is an investment contract between cryptocurrency developers and investors in crypto currency.
You need more than a blockchain to raise funds by selling digital currency as the investors want to know what kind of risk they are exposing themselves to and the kind of protection they will get.
Simple agreement for future tokens ensures that the rights of investors are protected and that the currency is viable. SAFT needs to comply with security regulations as they are considered security. When crypto currency developers want to go for a saft launch, they need to adhere to the sec ico regulation. Crypto currency developers can raise money within the country without entering into a formal contract with the investors, but if they want to access global markets, then they need to comply with state, federal as well as international law. This is where the saft agreement facilitates fund raising in compliance with regulations.
Who Takes the SAFT Agreement? – People Involved
A saft agreement is an official securities contract entered into by crypto currency developers who raise funds by selling digital currency and investors in digital currency. The crypto currency developers are able to access global funds through such agreements, and investors are assured that their investment is secure as there is compliance with securities regulations.
Purpose of the SAFT Agreement
Investors in crypto currency want to know the risks involved as well as the protection the have. Crypto currency dealers cannot sell digital currency by just building a blockchain. This is why a saft agreement is important.
There are no legal stipulations when crypto currency dealers when raising money locally, but global investors need a formal framework.
A saft agreement is prepared when a crypto currency dealer wants to raise funds through the sale of digital currency to accredited investors. Without this agreement, the dealer cannot access investors in international markets. The investor is assured that the investment in the digital currency is regulated by the securities exchange commission and their interests are protected. These agreements are normally entered into by high net worth individuals and institutions. New crypto currency ventures can legally raise money with these agreements. The agreement itself is considered a security. The investor does not get any coin or token for the money paid by them.
Sale of initial coin offering and other tokens got the same status as the sale of security through the Securities and Exchange Commission in 2017.
There is no coin or token sold, offered, or exchanged against the funds accepted from the investor when SAFT is sold. The investor receives a document which mentions that the investor will get access to a crypto currency or other product when it is created.
Contents of the SAFT Agreement – Inclusions
A saft agreement must include the names of the parties to the agreement, which would be the crypto currency developer and the investor.
The agreement must also include:
- Date of the agreement: The effective date on which the agreement was entered into
- Events: Events like a network launch before termination or expiry of the saft agreement where the purchaser will get tokens at lower of the purchase price or discount price. The purchaser will have to execute and send all transaction documents related to saft.
- Definitions: Definitions relating to such agreements like governmental authority, which relates to any nation or government or other authority laws, which mean laws, regulations or injunctions; person meaning an individual or legal entity and network launch, meaning the bona fide public release of trade tokens.
- Company’s representations: The incorporation of the company, performance of the SAFT, declaration that the transactions due to SAFT do not violate any rule.
- Purchaser’s representations: Legal capacity of the purchaser to execute this SAFT.
- Procedure: Procedures for purchase of rights and valuation of purchase amount
- Purchase Amount: The purchase amount and the trade tokens being purchased are also mentioned in the agreement.
- Purchaser documents: The documents required to be delivered to the company by the purchaser are mentioned here. The details of the purchaser’s network address where the tokens will be sent are also stated.
- Termination and expiration: The date of termination and expiration of the saft agreement as well as provisions for extension are also included in the agreement.
- Company representations: The company representations include the statement that all regulations are being followed.
How to Draft the SAFT Agreement?
While drafting a saft agreement, the following points need to be kept in mind:
- Parties to the agreement: The names of the parties to the agreement and the relationship between them also need to be mentioned
- Events: There should be a section on events that would include the network launch, which usually takes place before the investor contract expires or is terminated. During the launch the purchaser gets the tokens at lower of the purchase price or discount price. There is a clause where the purchaser needs to provide the company with the transaction documents as well as the network address.
- Expiry: The conditions under which the agreement will expire such as the issuance of tokens to the purchaser or the deadline date as well as provisions with regard to the extension of the deadline.
- Company Representations: The background of the company is mentioned, the rights and responsibilities of the company, the fact that the transactions carried out by SAFT will not violate any regulation.
- Purchase Representations: The background of the purchaser as well as the rights and duties. The fact that the purchaser is knowledgeable about the product, including its merits and risks.
- Purchase of rights: You can pay for the Right in terms of US dollar or Bitcoin or other currency.
Negotiation Strategy
Before entering into a saft agreement, the purchaser can negotiate the discount rate at which the standard tokens will be sold at a later date. There is usually a long gap between the purchase and delivery of tokens. The better the discount negotiated, the higher the profit at which the tokens can be sold once they are created.
Benefits and Drawbacks of the SAFT Agreement
The benefits of having a saft agreement are:
- Benefits for institutional investors: It allows institutional investors to invest in token for sales which would not have been legally possible otherwise
- Investor profile: The majority of the risk burden is shared by high net worth individuals and institutions, not small retail investors
- Block chain growth: With the SAFT network providing clarity with regard to securities law and taxation, there would be a growth of blockchain projects
- Initial Coin offerings: By following the SAFT white paper, there would be no excessive risk in the issuance of initial coin offerings.
The drawbacks of a saft agreement are:
- Crypto currency status: There is a possibility in the future that cryptocurrencies would be classified as securities, and this would go against all the benefits that the saft agreement provides.
- Applicability of agreement: Simple agreement for the future tokens will only be applicable to utility tokens and cannot be applied to actual security tokens
- Risk for purchasers: The purchasers of the token rely on the issuers of the tokens to sell the tokens at a profit.
- Specific investors: SAFT agreements are only meant for accredited investors, and the general public cannot participate and profit from ICOs.
- Restricted markets: The SAFT agreement was created with a focus on US security regulations.
What Happens in Case of Violation?
A soft agreement was formulated so that investors would invest in Initial Coin Offering tokens. Classification of ICOs has been a huge dilemma for government regulators. Initial coin offerings can be used for raising capital, which could be later transformed into a different commodity or asset.
In case of violation of a saft agreement, there are severe penalties that have to be paid by the crypto currency dealer. Without the saft agreement, the utility tokens issued by the crypto currency dealers would be considered unregistered securities and this would lead to extreme monetary penalties and up to 5 years imprisonment.
The company which deals in cryptocurrencies is likely to lose their license in case of breach of contract. The company is bound by the regulations issued by the securities exchange commission, and any form of non-compliance will result in termination of the contract. The breach will be resolved by arbitration in a court of law, such as the Swiss Chambers Arbitration Institution. The award by this arbitration institution shall be final and binding on both parties.
[Also Read: Arbitration Agreement]
As the dispute related to SAFT is personal, so the resolution shall be through individual arbitration and not through class arbitration, class action, or any administrative proceedings.
In order to facilitate investments in digital currency which are not otherwise considered security, saft agreements were drafted. These agreements in themselves are securities ensuring that digital currency is available for accredited investors.
A saft agreement must be drafted when a crypto currency dealer wants to sell digital currency, especially in international markets. Institutional investors can participate in initial coin offerings through SAFT.
The process of SAFT starts with the agreement signed between the developer and accredited investors. The investors get a discounted rate for the token, which will be delivered at a later date.
The funds are used by the developer to develop the application. The investors can sell the token at a profit once the application is developed.
The investor does not get anything during the ICO(1), but tokens will be delivered at a future date subject to the development of a network or application where the tokens can be used.