Fundraising for Blockchain Projects in Switzerland via Simple Agreement for Future Tokens (SAFT)

The Simple Agreement for Future Tokens (SAFT) is a financing mechanism for blockchain startups. This analysis explores the legal framework, advantages, and regulatory compliance of SAFTs, with a focus on Swiss regulations. It aims to clarify the structure and legal status of SAFTs in Switzerland, offering insights for entrepreneurs and investors.

What is a SAFT?

A SAFT serves as a financial mechanism for funding the development of a blockchain project. It typically involves selling advance rights to utility tokens which grant access to the project upon its completion. The name is derived from the Simple Agreement for Future Equity or SAFE, a financing instrument that grants future rights to equity.

A SAFT gives the investor no rights to future equity but rather the right toclaim a certain amount of tokens in the future.

As a result, the team can develop the blockchain project without having their shares in their company diluted. For the investor, the advantage lies in the potential appreciation of the token's value should the project succeed. Additionally, an investor's interest may be driven by altruistic reasons or enthusiasm for the product that the token will grant access to. To compensate for the higher risk at such an early stage, where the product is not yet developed, investor sare offered the token at a discount compared to the token price at launch.

The token offering through a SAFT comprises two phases: first, the sale of future tokens via the SAFT agreement, and subsequently, the actual distribution of the future tokens themselves.

Origins and Legal Status in the USA

Different SAFT templates can be found online, the original version was created by The SAFT Project as a template to be used in the United States. The purpose of the SAFT was to create a financing alternative for unfinished utility tokens that would take advantage of certain exemptions of US securities law.

The initial idea was to split the process into two phases to avoid falling under the scope of securities laws in the second phase. In the first phase, SAFTs,which are considered a security under US securities law, would be offered in a private offering solely to sophisticated investors. While the offering of securities requires a securities registration, the private offering to sophisticated investors is exempt from such a registration. In a second step, when the utility token is functional, such a token would not be considered as security, and it would be sold to the public. US courts have rejected this proposed treatment of SAFTs and have ruled that the phases cannot be split up but rather have to be treated as one process that falls under US securities laws.

Structure of a SAFT

The original SAFT is structured similarly to the SAFE. It defines certain trigger events and the resulting consequences of such trigger events. In case the project is successful, and the team launches the token to the public (Network Launch), the SAFT note holder will receive a certain amount of tokens determined by the highest pricerealized at the public token sale, divided by an agreed upon discount rate.

Example:
Purchase Amount = USD 1,000
Discount Rate = 80%
Maximum price per token during Network Launch = USD 1
Discount Price = USD 0.80
Units of Tokens received = 1250

In case the project is terminated, or the company is liquidated or dissolved (Dissolution Event), the SAFT note holder can claim their initial purchase amount multiplied by the discount rate. The SAFT investment can be contingent on a minimum amount of net proceeds from the offering of SAFTs.

It is possible and often seen that SAFTs are modified to tailor the agreement to the specific project and to accommodate certain aspects that are not regulated in the original SAFT.

Benefits of financing via a SAFT

The SAFT is used as an early-stage financing tool. Alternatives would be a loan, an equity investment or an initial coin offering (ICO). Typically, a bank loan will not be granted in the absence of a developed product unless the team pledges assets as collateral. An equity investment or convertible loan could be an alternative to a SAFT. They are quite common in traditional startup financing. However, SAFTs provide advantages. They bypass corporate law formalities like notarization or shareholder resolutions. Additionally, they avoid diluting shareholder equity. After the token launch, an investor through a SAFT becomes a regular user, detached from the company's operational or equity structure. Thus, SAFTs can be seen as an advanced form of crowdfunding, similar to platforms like Kickstarter, where backers support product development in exchange for the product at a discounted rate in return of other benefits. In comparison to an ICO, SAFTs can be utilized at an earlier stage, when the technology of the token/product is not yet functional.

Compliance with Swiss Financial Market Laws

The Swiss Financial Market Regulator (FINMA) differentiates the financing of not yet existent tokens into two categories. FINMA refers to the contractual future prospect of receiving a token as “pre-financing”. A “pre-sale” of tokens is defined as the receipt of tokens which entitle the acquirer to receive other different tokens at a later date. Both of these financing variants can be incorporated into a SAFT.

For the pre-financing of a token, the process is straightforward without involving any technical process. The investor simply signs the SAFT and receives tokens upon their creation. Conversely, a pre-sale involves the development team issuing tokens specifically for the purpose of exchanging them for the actual project tokens later on. This added step, although more complex, could provide investors with greater assurance regarding their investment. Both forms of the early financing of the project are considered as securities if they are standardized and suitable for mass standardized trading. If an asset is considered a security under Swiss law, the issuer needs to comply with certain requirements. For instance, the issuer is obliged to publish a prospectus.

While the FINMA differentiates its financial market regulation between three token kinds (utility, asset, payment), it does not take the different token kinds into consideration regarding an underlying SAFT.

Pre-saleand pre-financing of either kind of token are not considered as securities if they are standardized and not suitable for mass standardized trading. The SAFT is not suitable for mass standardized trading if the SAFT contractually prohibits the transfer or assignment of rights from the investor to a third party. The pre-sale token would not be suitable for mass standardized trading if, additionally, the transfer to a third party is restricted technically.

It is therefore possible that a token, such as a utility token, would not be considered a security, whereas the underlying SAFT could be classified as a security, unless the previously mentioned conditions are met.

Adherence to Anti-Money Laundering Regulations

Anti-money laundering (AML) regulations apply, among others, to financial intermediaries. While exemptions may apply, the offering of a SAFT should not fall under the scope of the Swiss Anti-Money Laundering Act (AMLA). However, it is important to differentiate the offering of a SAFT from the offering of the token itself or any activities anticipated post-launch of the token. Depending on the specific characteristics of the token or the activities the company intends to undertake, AMLA regulations might apply.

Restriction of Certain Jurisdictions

In Switzerland, the offering of a SAFT is not restricted solely to accredited investors. However, in other jurisdictions, such as the USA, a SAFT might be classified as a security. When classified as a security, the SAFT would then possibly be subject to the specific regulations of that jurisdiction. Additionally, sanctions regulations could restrict the offering of SAFTs in certain countries or to certain businesses or natural persons. Consequently, the possibility of offering SAFTs to citizens or businesses in specific jurisdictions should be assessed on a case-by-case basis, always in alignment with current regulations.

Conclusion

Financinga blockchain project via SAFT is a very viable option for Swiss companies. In comparison to the United States, SAFTS are not considered as securities if they are not standardized and not suitable for mass standardized trading. They offer the project team a convenient financing tool without the constraints that corporate financing tools bring along. To be certain that your token project complies with all relevant laws, we recommend a case-by-case review of your project. As experienced lawyers in the blockchain space, we would be pleased to help you realize your project.

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