Simple Agreements for Future Tokens, or SAFTs, may actually have the opposite regulatory effect than desired, according to the findings of a report, which highlighted the increased risks associated with SAFTs-based token sales.
The 13-page report, published by the Cardozo Blockchain Project at New York’s Cardozo Law School, suggested that the proposed framework for SAFTs was flawed, and instead of protecting token issuers from securities laws, could actually increase the chances of a regulatory breach.
The report also highlighted how the framework, if it goes ahead, could cause distortions, such as pushing early adopters to flip coins for a profit while driving up market costs for other investors and token end-users.
According to Cardozo Blockchain Project representatives, the report is meant as a “conversation starter,” and bases its criticisms of the SAFTs model on a report published by Protocol Labs and law firm Cooley. Nevertheless, ICO issuers, as well as those considering an ICO in future, will be keen to stew on the report’s remarks and recommendations.
Warning that solving the regulatory issues around ICOs is more complex than the SAFTs model allows, the report concluded:
“The SAFT approach could heighten the exuberance manifesting in markets for blockchain-based tokens and make it even more difficult to provide consumers access to potentially impactful new technology.”
ICOs have had a breakthrough year in 2017, with well over $2 billion raised through initial token offerings this year alone. However, regulators including the SEC have stepped forward to suggest some ICOs are in fact securities—a legal definition that attracts the need for complex securities regulation and regulatory oversight.
The SAFTs proposals split ICOs into two phases: the agreement for future tokens, and the token issue itself. While it has been proposed this method can be used to insulate against the need for regulation and compliance, the findings of the Cardozo report suggest otherwise.
“Artificially dividing the overall investment scheme into multiple events does not change the fact that accredited investors purchase tokens (albeit through SAFTs) for investment purposes, and likely will not prevent a court from considering these realities when assessing whether these tokens are securities.”