You can find a Notion version of this material here.
Token sales as a form of financing for software development projects came to life in 2013. Later in the same year, YCombinator introduced Simple Agreements for Future Equity. Although seemingly unrelated, these two new phenomena were destined to be synthesized. As a result, Simple Agreements on Future Tokens (SAFTs) were created.
The main ideas behind SAFE and SAFT are the same:
Using SAFT, new crypto projects can obtain financing in exchange for the promise of delivering a predefined value or number of tokens to investors if and when the token issuance event occurs. There are a few considerations relevant to the analysis of SAFTs:
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SAFTs typically do not provide for any remedies in case no token event ever occurs. However, when plans to issue tokens subsequently change, investors often agree on some replacement or compensation of the original award via other tokens or issuance of another financial instrument.
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Usually, SAFT is issued before the token generation event. It means there is typically no active market for SAFT-related assets. Hence, on the investor’s side, the fair value of SAFT-related assets is not readily determinable.
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However, some SAFTs may contain a vesting period that results in the release of tokens to the investor not at the time of token generation but later following the vesting schedule. Another form of vesting occurs when tokens are transferred to the investor at the token generation date but remain locked for a certain period with unlocking based on the predefined schedule.
Here are a few examples of what SAFT agreements may look like in the real world:
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SAFT-Project.org is a non-profit with the goal to improve and standardize the terms of Simple Agreements for Future Tokens. It is a great example of the best practices:
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Sample SAFT of Blockstack Token LLC (published on EDGAR):
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Sample SAFT of GLOVER AND THOMAS RESERVE OIL & GAS INC. (published on EDGAR):
Two sides to accounting for SAFTs are (1) the Developer’s Accounting and (2) the Investor’s Accounting.
(1) the Developer’s Accounting. There have been some discussions around accounting for SAFT by developers that we can find in SEC correspondence with YouNow, Inc. and Blockstack, Inc. This is a topic for a separate conversation that we will cover as part of our guidance on the web 3.0 software development projects.
(2) the Investor’s Accounting. There is no specialized guidance available for investor accounting for SAFT. It is also notable that accounting for SAFE notes (which served as a prototype for SAFT) is subject to extensive debates with different positions taken on this question by SEC and FASB.
So, what is SAFT for investors? Below we will review 7 questions about SAFTs:
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Q1. Is SAFT an Investment in Equity Security?
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Q2. Is SAFT a Derivative?
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Q3. Is SAFT a Security?
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Q4. Is SAFT an Investment in Debt Security?
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Q5. What is the appropriate presentation of SAFT on the Company’s balance sheet?
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Q6. How should companies measure the SAFT asset?
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Q7. How should companies measure the cost basis of tokens received?
Let’s go.
Answer 1: Typically, no, but it depends. Here, our analysis assumes that the investment in question is an investment in a software development project rather than a legal entity. Hence, the investment is in the business that has not been registered as a separate legal entity and the tokens under SAFT do not represent an investment into the ownership of equity or residual interest in assets of another entity. But sometimes, tokens may represent an interest in the ownership of another entity. In such cases, the accounting would be identical to the accounting for SAFE notes.
Answer 2: It depends. Based on the nature of the agreement, which is the promise to deliver a fixed (most commonly) number of tokens in the future at a price specified today, the arrangement is very similar to a forward contract. However, due to the absence of an active market and other net settlement provisions, SAFT would typically only meet the definition of a derivative once the token is traded on an active market. Hence, SAFT is typically accounted for as a derivative only after an active market for tokens emerges during the term of the SAFT arrangement.
Answer 3: We believe SAFTs are not securities in most cases. A security should possess all of the following:
“a. It is either represented by an instrument issued in bearer or registered form or, if not represented by an instrument, is registered in books maintained to record transfers by or on behalf of the issuer.
b. It is of a type commonly dealt in on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for investment.
c. It either is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations.”
[FASB ASC 320-10-20]
In our experience, most of the SAFTs will not be of a type commonly dealt in on securities exchanges or markets and are not represented by an instrument that is recognized as a medium of investments. As such, (unless facts and circumstances of a specific case provide evidence that the opposite conclusion is correct) SAFTs are generally not considered securities.
Answer 4: No, assuming the SAFT does not meet the definition of security as per the discussion included above.
Answer 5: We believe that this non-financial receivable should be presented as either an investment or other assets on the company’s balance sheet due to:
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The non-financial nature of receivables
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The assumption that the SAFT is not related to contracts between the investor and its customers
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The investment purpose of the transaction and
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The fact is that prior to the transfer of control over tokens to the investor, recognition criteria for intangible assets have not yet been met.
Answer 6: Based on ASC 310, Receivables, applied by analogy, the investment in SAFT should be measured on an amortizable cost basis and reviewed for the impairment when it is probable that a loss in value has occurred and the amount of can be reasonably estimated, according to ASC 450-20, Loss Contingencies (ASC 310-10-35-2 and 8).
If the active market for the token emerges prior to the receipt of tokens under SAFT (for example, when the vesting schedule extends beyond the token generation event date), the Company should also bifurcate and account for the embedded derivative on the number of tokens receivable and outstanding as shown in the summary schedule.
Answer 7: The cost basis of tokens received will be comprised of the total value of the Amortized Cost Basis and Embedded Derivative (if any) on the SAFT balance divided by the number of tokens outstanding.
Here is the source Excel file with calculations:
