The quoted portion is ignorant and incorrect bullshit.
The SAFT white paper clearly explains that the SAFT is a way of avoiding issuing a pre-functional token, which is likely to be classified as a security. The functional token that is ultimately issued must be a non-security.
The SAFT shares are the security, not the token.
Thus began the Great SAFT WARS...
There are arguments against SAFT. You either drink the Kool-Aid or you don't (or you seek to profit from the legal fees of the SAFT
). The SAFT fails and likely will fall out of use as more tokens that look like securities (considering given to established and clear cut standards/characteristics) are registering as securities or just do direct private placements
if they are security-like. Making utility tokens attached to securities seems to hurts ICOs and buyers more than it helps. The real solution against fraud is not a SAFT, but is a set of decentralized ICO rating agencies, open source code auditing, and other required benchmarks, AS WELL CONSUMER PROTECTION LAWS. Let's see you respond to this without using profanity.
. I want to thank you, though, for pressure testing the argument against SAFT usage and making it stronger as a result
(A) The SAFT proponents take a leap of logical reasoning with the expectation of profits prong, which they admit is not even likely to be satisfied. They fail this important prong, assume its met then proceed to the last prong ("efforts of others"), but that's generally not how it works, but for completeness here it goes:
Quoting directly from Cooley's whitepaper: So, without a doubt, that a profit motive is present is insufficient. Still, Forman can teach us more: It stands to reason that the purchaser likely would not have purchased the shares at all if he expected to lose money or merely break even upon resale. After all, what purchaser would buy a home knowing that it would be underwater when he decided to sell? Even if profit was a necessary outcome of the transaction for a prospective purchaser, it would be insufficient to satisfy this prong of Howey. To satisfy this prong, the purchaser’s expectation of profit must predominate
the expectation of using the thing purchased."
A utility token is a utility, profit or no profit Couldn't you actually make the argument that if a token purchaser REALLY REALLY wanted to use the protocol, they would seek to minimize costs for themselves and their business by buying into the pre-sale discount, as shown by their actions (1) they believe in the project and see benefit for themselves and (2) want to make it happen, so they risk it and contribute early on. And you can also argue that those who buy fully developed protocol tokens may actually be
more likely to be purchasing for monetary gain because the risk of loss is lower for fully developed blockchain protocol tokens. People who are willing to engage in a presale may be more likely to see the potential of the idea and desire to see it to fruition, hence their willingness to risk it big, on an idea where
profit is less likely than it is for an established token. Simply put the SAFT argument about functionality vs prefunctionality and expectation of profits can be a wash. Furthermore, most or many purchase agreements seem to have a "No Speculation" representation made by buyers. So it seems like buyers are in breach from the start if they buy for investment purposes, but courts and regulators do not seem to have addressed this point.
(B)
Just because a set of facts might be (slightly) more likely to pass a Howey prong ("efforts of others") of a test, surely this does not mean such facts WILL pass the test. I acknowledge that once up and running, the token may go up in value because of its usage. But then you must concede that a token is only as good as its
usage and not its stage of development, so even a fully developed blockchain has no value to tokenholders until the token and blockchain are
used. Its really just a timing issue, but one that does not really translate into legal substance. When there is a presale, there is no blockchain or at most not a functioning blockchain and there is no token (sometimes its just the discount coupon code) or a non functioning token, both have no value until
usage, so the reliance on the "efforts of others" is mitigated and not really there. you arent getting anything during a presale and even as the developers work you are getting nothing.
I repeat by definition utility only blockchain tokens have no value whatsoever and nor do their blockchains, they only have value because people use them or
believe they do. Token holders don't own the blockchain, they own a metrocard, an entry ticket into an amusement park. When you buy the presale and the developers the "others" you are allegedly relying on, nothing is happening in terms of profit. Nothing happens in terms of profit until people create a secondary market and even that does not (according to good law) does not make something a security.
So far we have "expectation of profits"(X) and "efforts of others" (X).
(C)
Alternatively, if you think about it, the SAFT does not even truly protect markets, if anything it centralizes markets and benefits the rich first and foremost and can make pumps and dumps more likely than less likely. Think about it this way:
(1) Under the SAFT framework, only AI's (wealthy and institutions can benefit from presales (which offer huge discounts) buying massive amounts and then they are free to sellof and lock in their discount price when they unload to the masses causing mass disruption with one trade. Only they get that privilege. And its actually less likely for market disruption when presales are open to more people on a distributed and decentralized basis (more people holding smaller amounts makes a better ma
(2) Why is a pre-functional token a security? Only because it is slightly more likely to pass the efforts of others prong? That argument is not exactly strong. Sure value of a token can go up as it is used more, but many seem to buy functional tokens for investment purposes only so the risk there is strong as well and should be considered securities.
(D) The SAFT goes WAAYYYYYY farther than even the SEC was willing to in its 21(a) report, which by the way is not an enforcement action and is really guidance more than anything and honestly, didn't add much new information to the ecosystem. The SEC Report basically just confirmed the Howey Test with very very very easy facts. The Howey Test contemplates the examples that look like securities and smell like securities, the SAFT arguments are a real stretch. There is a reason the SEC chose such clear cut facts. In fact the SEC case doesnt really do anything groundbreaking. There have been many cases that essentially say "no matter how creative you are, if it looks and feels like a security, it is, regardless of tech and nomenclatures"
Most pure utility tokens look nothing like the DAO, even with a presale. Cooley is smart as a business: How(ey) can we make money of the ICO craze? How can we monetize it for the big law firm? I heard the legal fees for their ICO services are very very steep.
Dasani -
This is an awesome reply on the downside risks of SAFT!
We appreciate that, especially at a time when all the news surrounding SAFT tends to pump.
Best!
-duber Partners
Wow! Hyperme has some great insight!
Hyperme.sh I think Duber is being sarcastic when characterizing your thoughtful contribution and rational argument; lazy cussing.
