The enfant terrible of the digital token world, the Simple Agreement for Future Tokens, or SAFT, continues to grab headlines. In the recent Telegram case, the federal district court for the Southern District of New York enjoined Telegram Group Inc. from proceeding with its long-planned token generation event, finding not only that the issuance of their tokens, Telegram Open Network, would violate the registration requirements of the Securities Act of 1933 but that the initial placement of SAFTs constituted an illegal unregistered offering of securities. On June 26, 2020, the court approved a settlement between the United States Securities and Exchange Commission and Telegram that included an $18.5-million civil penalty, the return of some $1.22 billion to investors and a three-year requirement to notify the SEC before issuing digital assets. That settlement extinguished the appeal, leaving the decision as the final legal determination. The SEC has made similar arguments in the case of the Canadian startup Kik last year. Nonetheless, billions of dollars of SAFTs have been issued by other issuers of which many remain outstanding and are subject to potential secondary market trading.
Although there have been variations, in a quintessential SAFT offering, an issuer raises funds to finance the development of a platform that will be driven by tokens by selling to investors a SAFT that represents the right to receive an allotment of tokens once the platform is launched. The purchase price is paid upon receipt of the SAFT, and the number of tokens to be delivered in settlement is determined on the date of the token generation event, usually at a discount to the public purchase price. For many issuers, numerous delays in launching the platform have caused SAFT holders to look for pre-launch exits, and as anticipated launch dates approach, other investors look for ways of buying tokens at discounted prices. Thus, there is a natural supply and demand for secondary transfers of SAFTs. However, such secondary sales are complicated by a number of contractual and regulatory factors, which are discussed in turn below.
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