Why SAFTs Are a Legal Minefield for Token Sales

The $1.7B Gram token sale was the death knell for the pure SAFT model. The SEC argued the entire scheme was a single, integrated offering of securities, rejecting the 'future utility' defense. The court's injunction forced a full refund.

• Key Takeaway: A two-step sale (SAFT then network launch) offers no legal separation.
• Key Takeaway: Marketing to US investors as an investment contract is fatal.

The 2017 $100M Kin token sale established the 'ecosystem as security' argument. The court applied the Howey Test, finding that investors expected profits from Kik's managerial efforts to build the Kin ecosystem.

• Key Takeaway: Promises of future development and exchange listings create investment contracts.
• Key Takeaway: A decentralized future is irrelevant if the initial sale is centralized.

This case proved that even a functional utility token (LBC) sold to fund development is a security. The SEC successfully argued that LBRY's marketing emphasized the token's potential value appreciation, not its immediate use.

• Key Takeaway: Developer fundraising via token sales is inherently risky under current SEC interpretation.
• Key Takeaway: Post-hoc decentralization does not retroactively legitimize the initial sale.

Issuing a SAFT creates a permanent, non-dischargeable liability on the project's balance sheet. If the token is later deemed a security by the SEC (like in the Telegram GRAM case), the company faces crippling rescission claims and penalties from every single purchaser.

• Liability Timeline: Exposure lasts for the statute of limitations, often 5+ years post-sale.
• Capital Risk: Funds raised must be held in reserve for potential refunds, stifling operational runway.

Early-stage VCs and funds often demanded SAFTs believing they provided superior legal protection vs. direct token purchases. This has proven a fallacy. The framework offers no shield against broader regulatory action that can render the underlying asset worthless.

• Concentrated Downside: A successful SEC action invalidates the investment thesis entirely, not just the contract.
• Liquidity Trap: Tokens received are often locked-up, preventing exit during regulatory scrutiny, as seen with Filecoin and Dfinity distributions.

Retail is systematically excluded from SAFT rounds, creating a two-tier investment landscape. By the time tokens hit public exchanges, initial investors have already captured the low-risk, high-upside phase.

• Asymmetric Information: VCs get tokens at ~80-90% discount to future public price.
• Pump-and-Dump Vector: Public launch becomes a liquidity event for insiders, not a fair distribution. This dynamic fueled the 2017-2018 ICO boom and bust.

The SAFT's explicit structure—an investment contract for a future asset—practically dares regulators to classify it as a security. It creates a clear paper trail of investment intent and profit expectation, the core of the Howey Test.

• Enforcement Priority: Projects like Kik (Kin) and Telegram became high-profile test cases because of their documented SAFT sales.
• Precedent Risk: Each successful action sets a precedent that endangers every other SAFT-based project, creating systemic legal risk.

The Simple Agreement for Future Tokens is itself an investment contract under the Howey Test, creating immediate legal exposure. Issuing a SAFT is functionally identical to selling a security, triggering registration requirements or needing an exemption.

• Primary Risk: The SEC's action against Telegram's $1.7B Gram token sale established that future token promises are securities.
• Investor Lock-In: Early SAFT purchasers are often accredited investors, creating a two-tier system that complicates future public distribution.

The core legal theory behind SAFTs—that token delivery converts the asset from a security to a commodity—has been eviscerated by the SEC. Post-delivery, the token's functionality and decentralization are scrutinized.

• Regulatory Gap: Projects like Filecoin and Dapper Labs faced continued scrutiny years after token delivery.
• Builder Burden: The onus is on the project to prove sufficient decentralization at launch, a nearly impossible standard for early-stage teams.

Modern frameworks prioritize regulatory clarity and community alignment over upfront capital. The shift is towards credible neutrality and avoiding pre-sale investment contracts.

• Airdrop Model: Used by Uniswap and Ethereum Name Service, distributing tokens based on usage, not investment.
• Regulation D/S: For necessary fundraising, structured private sales to accredited/international investors with clear lock-ups are safer than speculative SAFTs.
• Future-Proofing: Designs like the LAO or Rollup Token models bake utility and governance into the initial structure.

For VCs and funds, the SAFT structure creates hidden liabilities and misaligned incentives. Due diligence must now audit legal structure with the same rigor as technology.

• Red Flag: A cap table dominated by SAFT holders from years ago indicates unresolved regulatory risk and potential future sell-side pressure.
• Liquidity Trap: Tokens from SAFTs are often subject to lengthy cliffs and vesting, creating illiquid positions that can't be easily exited during enforcement actions.
• Key Question: "What is your legal theory for this token not being a security at launch, and how does the SAFT documentation support that?"