A lot has been written about the legal framework surrounding initial coin offerings (ICOs) and how regulators, like the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Financial Crime Enforcement Network, and the Internal Revenue Service, will treat crypto-assets issued through this new crowdfunding model. However, despite the best legal and entrepreneurial minds speaking on these issues, at the end of the day, no one knows how courts and regulators will treat this new method for raising capital
Distributed data storage processing platform IPFS (InterPlanetary File System) is hoping to help solve this problem with its “SAFT” (Simple Agreement for Future Tokens) project. Expanding on Ryan Zurrer’s recent introduction to the project, at his Consensus 2017 presentation, Juan Benet of IPFS called for attorneys and regulators to join the open source movement and create a framework by which the industry can regulate itself. Benet hopes that this will signal to regulators that members of the blockchain community aim to work with (rather than against) government agencies, and support their efforts to protect consumers and ensure that ICOs are not exploitative or fraudulent in nature.
Benet explained that SAFT hopes to emulate the world-wide success of Y Combinator’s SAFE contracts, which “work just like convertible notes, but with fewer complications.” He believes a major point of focus for regulators is whether a company is in its formative stages with just a white paper or a minimal level of work (in which case, an ICO is a “pre-sale”), or whether the platform is already active and tested and now selling actual tokens for its operation (or “post-sale”). If an ICO is a pre-sale, one possible solution for startups hoping to avoid oversight is to utilize Regulation D’s Rule 506(c) exception that allows startups to issue securities in an open sale without the costly and time-exhaustive requirement of registering with the SEC, so long as they only offer securities (or in this case, tokens) to “accredited investors” and have taken reasonable steps to ensure that participants meet this qualification. On the other hand, Benet believes that post-sales can operate more similarly to recent ICOs.
Benet acknowledged that this is only one possible solution and that other strong possibilities have already been published. While SAFT already has the backing of legal and entrepreneurial heavy hitters Orrick, Herrington & Sutcliffe LLP, Cooley LLP, and AngelList, he hopes that other firms will join the mix and contribute their thoughts on how this industry can police itself in a lawful manner that promotes the common good. This open source framework can be utilized by anyone involved in ICOs, including those hoping to use IPFS’s recently announced CoinList platform.