Far from insulating token issuers against regulatory actions, the proposed SAFT framework may truly increase the threat certain sales run afoul of securities laws, according to a new report out nowadays.
If put into practice, the Simple Agreement for Future Tokens (SAFT) structure could misalign incentives, encouraging sophisticated early investors to flip tokens for a profit and driving up their cost to finish-users, warns the report from the Cardozo Blockchain Project at Cardozo Law School in New York.
The 13-web page report lays out a detailed, though civil, critique of the SAFT white paper issued last month by the Cooley law firm and Protocol Labs. That paper was billed from the get-go as a conversation-starter, and Marco Santori, the Cooley lawyer who spearheaded the project, invited feedback from the legal community.
But the feedback in the Cardozo paper suggests that generating initial coin offerings (ICOs) compliant with securities laws, while nevertheless delivering on the technology’s disruptive guarantee, may possibly be a harder needle to thread than the SAFT solution anticipates.
The paper cautions:
“[T]he SAFT method could heighten the exuberance manifesting in markets for blockchain-based tokens and make it even a lot more challenging to supply buyers access to potentially impactful new technology.”
Stepping back, the SAFT framework known as for splitting the ICO process into two parts in order to steer clear of the threat specific sorts of blockchain tokens may be classified as securities.
Initial, the developers of a token-based blockchain network would raise income from accredited investors to build it. In return, the investors would get the right to tokens after the platform is completed, possibly at a discount. This agreement, recognized as a SAFT, would be registered as a safety with the Securities and Exchange Commission (SEC).
In the second element, after the network is up and operating, the tokens are sent to the investors, who can then sell them on the open market. The tokens themselves would not be securities, enabling the basic public to get them for use on the platform.
In this way, only wealthy individuals and institutional buyers, not the proverbial mom-and-pop investors, would bear the risk of the project failing, whilst consumer protection regulations would still apply if the final solution – the network – turns out to be defective. And importantly, the publicly offered tokens would not meet the so-called Howey test of regardless of whether something is a security, the SAFT white paper argued, because only the early investors would be expecting a profit from “the efforts of other people.”
But according to the Cardozo paper, bifurcating the procedure like this might really compound the risks to token issuers and shoppers alike.
For starters, the paper says, there is no “vibrant-line” test for whether or not an instrument is a security.
“[C]ourts and the SEC have repeatedly, and unambiguously, explained that the test for whether a specific instrument will be deemed a safety depends not on vibrant-line guidelines but rather on the relevant details, situations and economic realities,” the Cardozo paper says.
Further, in order to attract the early investors in a SAFT safety, the sellers would naturally be expected to “emphasize the speculative, profit-producing prospective of the underlying utility token,” the authors write.
However, advertising and marketing the agreement this way “may effectively influence a federal securities law analysis of a token created pursuant to a SAFT,” they warn, adding:
“Artificially dividing the general investment scheme into numerous events does not adjust the reality that accredited investors acquire tokens (albeit by means of SAFTs) for investment purposes, and probably will not avert a court from thinking about these realities when assessing whether these tokens are securities.”
Therefore, “[t]okens underlying a SAFT may possibly be far more probably to be deemed securities, thus potentially subjecting token sellers to substantial legal or economic dangers,” the paper says – the opposite result of what the proposal set out to do.
The other primary danger is that the SAFT approach “creates a class of early investors that are incentivized to flip their holdings as an alternative of supporting enterprise development, which could fuel speculation and hurt buyers,” the Cardozo critique says.
The concern is that well-connected insiders “will receive exclusive access to purchase utility tokens — a fundamentally consumptive technology — at an early stage in the platform’s development and at substantial discounts, even even though they have no intent to use these tokens or appreciate the underlying technologies.”
Rather, these gatekeepers would drive up the price tag of the tokens through speculation, “potentially creating it more pricey for consumers to purchase tokens and participate on these networks,” the report says.
It concludes ominously:
“When stripped to its core, even although the SAFT Method is couched in terms of customer protection, the result extremely nicely could be the opposite.”
In other words, rather than democratizing access to technologies, as blockchain networks are frequently purported to do, the SAFT may possibly just generate an additional old boys’ club.
For his component, Santori mentioned he and his SAFT white paper co-authors welcomed the Cardozo response.
“We’re over the moon to see the SAFT Project operate like this,” he stated by email nowadays, adding: “Creating this type of commentary and discourse is precisely the aim of the Project and precisely what the sector needs to develop a compliant token sale framework.”
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Published at Tue, 21 Nov 2017 17:40:30 +0000