The SAFT Agreement: Pre-Functional Token Offering Framework

The Simple Agreement for Future Tokens (SAFT) was designed in 2017 by attorneys at Cooley LLP and Protocol Labs as a Reg D-compliant framework for funding blockchain projects that had not yet built a functional network. The SAFT structure treated the investment agreement itself as the security (sold to accredited investors under Reg D 506(c)), with the future token delivery classified as a non-security utility token once the network launched and achieved sufficient decentralization. The theory was elegant — but subsequent SEC enforcement actions — the SEC brought 125 cryptocurrency-related enforcement actions between 2021 and 2024 according to Cornerstone Research, generating $6.05 billion in penalties — particularly against Telegram (TON) and Kik (Kin), effectively dismantled the SAFT’s core assumption about post-delivery non-security status. The November 12, 2025 unveiling of Project Crypto by Chairman Atkins, which includes plans for a token taxonomy anchored in Howey test investment contract analysis, and the March 2026 SEC-CFTC joint token taxonomy guidance, may eventually provide clearer classification standards that could revive modified SAFT structures.

The SAFT Structure

How It Works

The SAFT follows a two-phase structure modeled after the Simple Agreement for Future Equity (SAFE) used in venture capital:

Phase 1: Investment contract. The issuer sells SAFT agreements to accredited investors under Reg D 506(c). The SAFT is explicitly classified as a security — an investment contract under the Howey test — because investors are deploying capital with an expectation of profit dependent on the issuer’s efforts to build the network. The issuer files Form D and complies with all Reg D requirements.

Phase 2: Token delivery. Once the network is functional and sufficiently decentralized, the issuer delivers tokens to SAFT holders. Under the SAFT theory, these delivered tokens are no longer securities because: (a) the network is functional (tokens have utility), and (b) the network is sufficiently decentralized (no single party’s efforts drive the token’s value, defeating the Howey test’s “efforts of others” prong).

The Decentralization Hypothesis

The SAFT framework relied heavily on the concept articulated in the William Hinman speech (June 2018), where the then-Director of the SEC’s Division of Corporation Finance suggested that a digital asset initially sold as a security could, over time, cease to be a security if the network becomes sufficiently decentralized. Under this theory, Ether was no longer a security despite being sold to fund Ethereum’s development.

SEC Response: The SAFT’s Unraveling

SEC v. Telegram Group (2020)

Telegram raised $1.7 billion through SAFTs sold to accredited investors under Reg D for its TON blockchain. The SEC sued to block token delivery, arguing that the entire scheme — SAFT purchase plus token delivery — was a single unregistered securities offering. The court agreed.

Key holding: The court rejected the two-phase structure, finding that the SAFT and the token delivery were part of an integrated offering. The “economic reality” was that investors purchased SAFTs for the purpose of profiting from the tokens — not for the investment contract itself. The tokens, when delivered, retained securities character because the network was not sufficiently decentralized and investors continued to expect profits from Telegram’s efforts.

SEC v. Kik Interactive (2020)

Kik raised $100 million through a combination of Reg D SAFT sales (to accredited investors) and a public token sale (to anyone). The SEC brought an enforcement action arguing that both phases constituted a single unregistered offering.

Key holding: The court applied the integration doctrine to treat the Reg D SAFT phase and the public token sale as a single offering. Because the combined offering included sales to non-accredited investors without registration, the entire offering violated Section 5. Kik paid a $5 million civil penalty.

Current Status and Residual Uses

While the SAFT’s original use case is largely defunct, the instrument retains limited utility for genuine security token projects:

Security token funding. If the delivered token is classified as a security (not a utility token), the SAFT structure works: the SAFT is the investment contract, the security token is delivered as the final security, and the entire lifecycle is treated as a securities offering under Reg D. The Rule 144 holding period runs from the original SAFT purchase date, and the delivered security tokens can trade on ATS platforms after the holding period expires.

Fund tokens. Venture funds that tokenize fund interests can use SAFT-like instruments to accept capital commitments before the fund’s token smart contract is deployed, with token delivery upon fund closing.

Alternative Structures Post-SAFT

Token projects seeking compliant capital formation now prefer:

• Direct Reg D token offering. Issue the security token directly under Reg D 506(c), classifying it as a security from inception. Tokens trade on ATS platforms after Rule 144 holding period.
• Reg A+ token offering. Full SEC qualification, retail access, freely tradable immediately.
• Equity-first tokenization. Raise capital through traditional equity, then tokenize on Securitize or tZERO.
• Commissioner Peirce’s Token Safe Harbor — proposed but never adopted three-year grace period for achieving decentralization.

Lessons for Token Issuers

1. Do not assume delivered tokens lose securities status. The SEC looks at the economic reality of the entire capital-raising scheme.
2. Design for securities compliance from the start — build smart contract transfer restrictions, engage a transfer agent, and plan ATS listing from inception.
3. Integration analysis is critical for any multi-phase structure.
4. The Howey test is a continuing obligation — securities status applies at each transaction throughout the token’s lifecycle.

SAFT in Current Practice

Despite the regulatory setbacks, SAFT-like structures continue to be used in modified forms. Current best practices for pre-functional token offerings include:

Token warrant agreements. An evolution of the SAFT, token warrants grant the right to receive tokens upon network launch, structured explicitly as a security under Reg D 506(c) with full accredited investor verification. Unlike the original SAFT theory, token warrants do not assume the resulting tokens will be non-securities — they treat the entire lifecycle (pre-launch and post-launch) as involving securities.

Staged offering structures. Issuers conduct an initial Reg D 506(c) offering for the SAFT itself, followed by a separate offering or registration for the delivered tokens. This staged approach requires careful integration doctrine analysis to ensure the two offerings are not combined into a single offering that might fail both exemptions.

Token side letters. Some venture capital investments include token side letters granting investors the right to receive tokens at a future network launch. These side letters raise securities classification questions similar to SAFTs but are typically addressed within the broader equity investment’s compliance framework.

SAFT and the International Context

The SAFT framework has been more warmly received in certain international jurisdictions:

Switzerland. FINMA’s token classification framework distinguishes between payment tokens, utility tokens, and asset tokens. Pre-sale agreements for utility tokens that will have genuine consumptive function are treated differently than asset token pre-sales, creating more hospitable conditions for SAFT-like structures.

Singapore. The MAS has permitted pre-functional token sales under certain conditions, particularly where the tokens have genuine utility function and the issuer maintains a clear development roadmap.

European Union. Under MiCA, white paper disclosure requirements apply to all crypto-asset offerings regardless of whether the token is functional at the time of sale, providing a regulatory framework that accommodates pre-functional offerings without requiring the SAFT’s two-step approach.

SAFT and the SEC Crypto Task Force

The Crypto Task Force has discussed whether a modernized pre-functional token framework could address the SAFT’s limitations. Potential approaches include:

• Escrow-based token delivery. Tokens held in escrow until network functionality is achieved, with automatic refund provisions if development milestones are not met. Smart contract-based escrow could automate both the delivery and refund mechanisms, providing investor protection that SAFTs lacked.
• Milestone-based conversion. Investment contracts that convert to utility token rights upon verified achievement of decentralization metrics, potentially aligned with FIT21’s certification process.
• Enhanced disclosure. Pre-functional offerings permitted under Reg D 506(c) or Reg A+ with enhanced disclosure requirements addressing development timelines, technical milestones, and fund use restrictions. This approach treats the entire token lifecycle as involving securities but reduces compliance costs through standardized disclosure templates.

The Commissioner Peirce token safe harbor proposal represents the most developed framework for addressing pre-functional tokens, providing a three-year development period during which teams could distribute tokens without full securities registration while maintaining antifraud liability and basic disclosure obligations.

Key Lessons for Token Issuers

The SAFT experience offers several lessons for current token projects:

1. No contractual structure can transform a security into a non-security — classification depends on the economic reality of the transaction under the Howey test.
2. The SEC treats pre-functional token sales as securities offerings regardless of the contractual mechanism used.
3. Post-delivery token classification depends on the same Howey factors as the initial sale — the Hinman speech concept of “sufficient decentralization” has not been endorsed by courts.
4. The safest approach is to assume the token is a security throughout its lifecycle and structure compliance accordingly through Reg D, Reg A+, or Section 5 registration.

Quantitative Impact of the SAFT Framework

The SAFT framework’s rise and decline can be traced through Form D filing data and enforcement outcomes:

Capital raised through SAFTs (2017-2020). During the peak SAFT period, an estimated $5-7 billion was raised globally through SAFT agreements, with U.S.-based offerings representing approximately $2-3 billion of that total. The largest SAFT offerings — Telegram ($1.7 billion), Filecoin ($257 million), and Polkadot ($145 million) — demonstrated both the framework’s capital-raising potential and the regulatory risks it created.

Enforcement outcomes. The SEC’s enforcement actions against SAFT-based offerings resulted in over $2 billion in combined penalties, disgorgement, and settlement amounts. The Telegram settlement alone required the return of $1.2 billion to investors, plus an $18.5 million civil penalty. These outcomes effectively demonstrated that the SAFT framework’s assumption of post-delivery non-security status was not supported by the SEC’s enforcement posture or by federal court precedent.

Market shift to direct offerings. Following the Telegram and Kik rulings, Form D filings for security token offerings shifted decisively toward direct token offerings under Reg D 506(c) — where the token itself is classified as a security from inception — and away from SAFT-based structures. By 2023, fewer than 5% of digital security Form D filings used SAFT or SAFT-like structures, compared to approximately 40% in 2018.

SAFT Structures and Current Market Conditions

The STO market’s growth from $5.6 billion in 2024 to $6.66 billion in 2025 has reinforced the shift away from SAFT-based structures toward direct security token offerings. Modern issuers increasingly use platforms like Securitize ($4 billion+ in tokenized AUM), tZERO (near-24/7 trading since December 2025), and INX (acquired by Republic for $60 million in April 2025) for direct Reg D 506(c) token offerings that classify the token as a security from inception. BlackRock’s BUIDL fund ($1.87 billion AUM) exemplifies the institutional approach: rather than using a SAFT to fund development and later deliver tokens, BUIDL launched as a fully compliant tokenized money market fund on Ethereum via Securitize with immediate functionality. The SEC’s Crypto Task Force — through its six roundtables and the March 2026 SEC-CFTC joint token taxonomy guidance — is developing classification standards that could eventually define clearer pathways for pre-functional tokens, but issuers should not rely on future regulatory developments. The enforcement track record is unambiguous: the SEC brought 125 cryptocurrency-related enforcement actions between 2021 and 2024 generating $6.05 billion in penalties, and SAFT-based structures that assumed post-delivery non-security status accounted for over $2 billion in combined penalties and disgorgement. The December 11, 2025 DTC no-action letter for tokenization services on permissionless blockchains further validates the direct issuance model over the two-phase SAFT approach, as tokens designed for traditional settlement infrastructure benefit from classification certainty from day one.

For the Reg D 506(c) framework, see our guide. For Form D filing requirements, see our compliance guide. For enforcement actions involving SAFT structures, see our tracker. For the FIT21 Act approach to pre-functional token classification, see our legislative analysis. For the SEC’s Framework for Investment Contract Analysis, see SEC Digital Asset Framework.