The Financial Industry Regulatory Authority (FINRA), a Washington-based self-regulatory body, has cautioned investors to beware of ICOs touting their adoption of the SAFT (Simple Agreements for Future Tokens) framework as evidence of investment security or regulatory compliance.
The warning, which appears in its August 16, 2018 Investor’s Alert publication addressing potential ICO investors stresses that the SAFT framework is by no means an iron-clad guarantee of regulatory approval, but is comparable to a private opinion that regulators may or may not choose to align with.
The statement reads in part:
“Know that investing in a SAFT contract does not mean the offering is “safe” or compliant with applicable federal and state laws…No matter what a company says about the ability of a token to change characteristics from a security to a non-security, there is no guarantee that the SEC or the courts would agree with a company’s assessment. A determination of whether something is a security is a facts and circumstances analysis, and titles don’t change that.”
A Simple Agreement for Future Tokens (SAFT) is an investment contract offered by cryptocurrency developers to accredited investors, which promises to deliver a certain number of tokens when the network or company is operational. It differs from the standard ICO in that whereas an ICO issues the tokens or coins immediately, the SAFT is effectively a promise to deliver the tokens.
SAFT contracts are considered to be securities and as such, must meet securities regulations. Under the framework, SAFT contracts are issued as securities to investors during the ICO, assuring them that the tokens will be delivered afterward at some specified time. However, at the actual point of issuance, the tokens can be labeled as utility tokens which operate outside of extant security laws.
Increased Regulatory Attention
This publication from the FINRA is in line with recent activities of federal regulatory bodies such as the US Securities and Exchange Commission(SEC) to offer more regulation on the cryptocurrency industry, particularly on ICOs.
In March 2018, CCN reported on an SEC probe into ICOs and blockchain startups based on suspicions that many ICOs have taken place in violation of existing regulations. On that occasion, the SEC served subpoenas to 80 cryptocurrency startups requesting information on the structure of token sales and pre-ICO sales.
Alongside increased regulatory attention, the ongoing probe, which is expected to last for up to a year has led a number of cryptocurrency companies to take self-protecting measures such as banning US investors from participating in ICOs.