I’ve never been a fan of the “the SAFT is a security but the token isn’t” theory. As a refresher, the Simple Agreement for Future Tokens (“SAFT”) is an investment contract where funds will be used by the issuer to develop its blockchain platform and issue digital tokens that can be used on that platform as repayment for the SAFT. If you are selling contracts to obtain tokens which will eventually do a thing, but can’t yet, on a platform that is yet to be built, chances are those tokens issued to repay the SAFTs are securities.
That being the case, if you are issuing SAFTs or SAFEs (Simple Agreement for Future Equity) or any form of convertible instrument that pays out to investors with digital tokens, then both the original, overlying security, and the underlying security into which it is convertible or exchangeable (the token) need to comply with securities laws.
However, just because something is a security at one point in time does not mean that it will always be a security. Recent comments by both SEC Chairman Jay Clayton and Corp Fin Division Director Bill Hinman have reinforced that fact. At some point, a security can become a utility token.
So when does that happen?
Hinman’s recent speech focuses on the eventual decentralization of a network as an indicator of non-security status. This is a more useful test for true cryptocurrencies than it is for corporate issuances. When a corporate issuer is involved, the analysis should focus on the “economic substance of the transaction” (and Hinman offers several factors that should be considered in that analysis).
Interestingly, for some purposes, it doesn’t really matter when a security token morphs into a utility token. If the initial offering is conducted in accordance with the registration requirements of the Securities Act (that is, registered or made in accordance with an available exemption, including the imposition of periods during which transfers are restricted) then from the issuer’s point of view that’s all they need to worry about. Since by definition a thing that can morph into a utility token is not an equity security, there are no Section 12(g) registration trigger concerns and state corporate law is unlikely to constrain company recordkeeping.
The folks who do have to worry about whether a thing is still a security or has completed its morph into a utility token are the exchanges. This is especially true for exchanges outside the United States who will not trade instruments that US law treats as securities.
I do think we need to have (yet another) acronym for instruments that can morph from security to utility token so as to flag the instrument’s status to investors and traders/consumers. I’m thinking “Future Utility, Current Security.” Think it will catch on?