Not So Fast--Risks Related to the Use of a SAFT for Token Sales

On October 2, 2017, Cooley LLP and Protocol Labs released a whitepaper entitled “The SAFT Project: Toward a Compliant Token Sale Framework” (the “Whitepaper”), purporting to develop “a new, compliant framework” for engaging in the sale of blockchain-based tokens. The Whitepaper acknowledged that the framework has limitations, and invited a conversation within the blockchain and legal community. In that spirit, the below report analyzes the framework proposed in the Whitepaper and highlights a number of risks related to the use of a Simple Agreement for Future Tokens (a “SAFT”) for token sales. As explained below, while the framework proposed in the Whitepaper is arguably attractive in its simplicity, it may create more problems than it solves for sellers that follow its prescriptions. In particular, the Whitepaper seemingly advances an approach that: Blurs the true test of how tokens will be analyzed under U.S. federal securities law, which is highly dependent on the relevant facts and circumstances; Increases the risk that a token will be treated as a security by emphasizing the token’s speculative, profit-generating potential and relying on vague notions of “functionality” as a panacea to guard against broad securities laws implications; and Creates a class of early investors that are incentivized to flip their holdings instead of supporting enterprise growth, which could fuel speculation and hurt consumers. Although outside the scope of this report, the approach advanced in the Whitepaper also creates: (i) uncertainty as to the tax treatment of SAFT proceeds; and (ii) risk that the SAFT may constitute a non-exempt forward contract with potential implications under U.S. commodities laws. This report aims to advance the conversation regarding this emerging space and to caution those who may seek to rely solely on the Whitepaper’s conclusions as a basis for analyzing potential U.S. securities law risks when engaging in a token sale. The report does not take a position on whether other pre-sale or pre-order agreements for pre-functional tokens could comply with securities law. And, it is not intended to—and should not—be relied upon as legal advice; token sellers should consult their own counsel. The report proceeds in three parts. The first two sections provide a brief overview of utility tokens and the SAFT proposed in the Whitepaper. The final section outlines four concerns that should serve as a warning for those considering buying or selling tokens through a SAFT

Smart Contracts & Legal Enforceability

Thousands of years ago, written contracts first appeared in Mesopotamia, with small cuneiform triangles hammered into clay tablets. These contracts were fairly sophisticated, memorializing basic credit agreements, partnership arrangements, as well as labor, sales, and rental agreements.1 Since these first recorded contracts, the tools used to create written contracts have undergone considerable change. We no longer enter into agreements memorialized in clay; paper and more recently electronic agreements serve as the primary medium for the expression of commercial arrangements. Many argue that blockchains could foster an evolution in how legal agreements are created and executed, supporting a new generation of electronic contracts. Blockchain networks and computer programs called “smart contracts” could enable parties to memorialize all or parts of legal agreements. By using this technology, contracting parties would gain the ability to create arrangements that are hard to modify, dynamic, and potentially less ambiguous than traditional legal contracts. This report assumes such a future comes to pass and examines how blockchain technology fits within the current common law and U.S. electronic contracting statutes, analyzing whether smart contracts can be used to create enforceable legal agreements. As outlined below, we explain why current U.S. law largely accommodates the use of smart contracts to create binding and enforceable agreements. We conclude the report by analyzing whether additional state and federal legislation is necessary to support this new emerging technology, finding that current iterations of state law, designed to accommodate blockchain technology, may not be necessary, with limited exceptions. The report unfolds in three parts. Part I provides a brief overview of blockchain technology and smart contracts, with an assumption that the reader has limited familiarity with the underlying technology. Part II explores whether legal agreements relying on blockchain technology will be deemed enforceable. Finally, Part III evaluates whether additional legislation is necessary to accommodate electronic contracting involving blockchain-based smart contracts