March 1, 2018

ICOs: “SAFT” Unlocks Reg D for Token Deals

According to this MarketWatch article, the number of coin offerings relying on Reg D has risen rapidly since the SEC first issued guidance on coin offerings last July – while only a single Form D was filed during the first half of 2017, that number grew to 43 during the second half of the year. The pace continues to accelerate – already this year, nearly 40 Form Ds have been filed through February 20th.

While a heightened awareness of the need to stay “on-side” with the SEC probably accounts for a significant percentage of the filings, another factor may well be the existence of a “blueprint” in the form of a “Simple Agreement for Future Tokens” that was developed last Fall.  Here’s an excerpt with some of the background:

In a whitepaper published in October, Marco Santori, an attorney at Cooley and an advisor to the International Monetary Fund, and Juan Batiz-Benet and Jesse Clayburgh of blockchain developer Protocol Labs, say that public token sales, or ICOs, may be “a powerful new tool for creating decentralized communities, kickstarting network effects, incentivizing participants, providing faster liquidity to investors, and forming capital for creators.” However, these boosters warn that many token sellers run a huge risk of the SEC shutting them down if they don’t follow all the securities laws to the letter.

Most token sales have shunned U.S. investors, out of fear by the promoters that their participation would bring the SEC calling.

That’s why the whitepaper from Santori, Benet and Clayburgh proposed a new approach to structuring these deals to meet the SEC’s requirements. Their effort has been successful. Most of the ICOs filed using Form D since mid-2017 — but not all and not KodakCoin — now use this approach, called a Simple Agreement for Future Tokens, or SAFT, as their legal framework.

If the SAFT concept rings a bell, that’s probably because it’s based on Y Combinator’s “Simple Agreement for Future Equity” – otherwise known as “SAFE” – which has become a popular template for startup financing. Don’t forget our upcoming webcast: “The Latest on ICOs/Token Deals“…

One of our members alerted me to an ongoing debate about the SAFT approach centering on the white paper’s position as to the status of “genuinely functional” tokens under the Securities Act. Check out this Cardozo Blockchain Project white paper.

More on “Insider Trading – It’s Worse Than You Think?”

In our last episode, we noted that a bunch of recent studies have concluded that everything is terrible & the markets are rigged. Well, it turns out that those studies might have understated the problem. According to this MarketWatch article, the VIX is fixed too:

One of the most popular measures of volatility is being manipulated, charges one individual who submitted a letter anonymously to the SEC and CFTC.

The letter makes the claim to regulators that fake quotes for the S&P 500 index SPX, +0.04% are skewing levels of the Cboe Volatility Index VIX, +1.73% which reflects bearish and bullish options bets 30-days in the future on the S&P 500 to gauge implied stock-market volatility (see excerpt from the letter below).

“The flaw allows trading firms with sophisticated algorithms to move the VIX up or down by simply posting quotes on S&P options and without needing to physically engage in any trading or deploying any capital. This market manipulation has led to multiple billions in profits effectively taken away from institutional and retail investors and cashed in by unethical electronic option market makers.”.

The CBOE says the whistleblower’s all wet* – but a follow-up article quotes former SEC Chair Harvey Pitt as saying that “it’s quite clear” that indexes like these can be manipulated.

* In other words, “ChiX Nix Vix Fix” – I know, I know. . . I’m sorry, but it was just laying there & I couldn’t resist doing that little riff on one of the most famous newspaper headlines of all time.

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John Jenkins