The US SEC amendments and SAFT process

Earlier this year, the United States Securities and Exchange Commission - in both the SEC versus Telegram and SEC versus Kik cases - vigorously argued that sales of contractual rights to acquire tokens on a when-issued basis should be integrated with later sales of the tokens.

At the risk of oversimplifying, integration is a legal doctrine which says all sales that are part of a "Single offering" must comply with the requirements of that offering.

Because the token sales were not conducted in such a way that they met the requirements of the original sales of contract rights, the entire offering was found to violate securities laws.

"Any offering made more than 30 calendar days before the commencement of any other offering, or more than 30 calendar days after the termination or completion of any other offering, will not be integrated with such other offering."

One applies to distributions of securities in compliance with a bona fide compensation plan under Rule 701; the other applies if the second offering is registered with the SEC; and the last applies if the second offering is made pursuant to an exemption that allows general solicitation.

The SEC contended that this made the purchasers underwriters, which prevented the initial "Offering" from ever closing.

To give substance to the new safe harbors: If Telegram had carefully designed its process to ensure that the initial "Offering" of the contractual rights closed and therefore ended for a period of time, thereby at least meeting the terms of the safe harbor, it seems like a different analysis would have been needed in order to find a violation of the securities laws.

Of course, if the court had not integrated the sales in SEC versus Kik, it could have found that the Kin tokens were themselves securities and thus subject to the requirement that they be registered or sold in compliance with an exemption from registration.

The court did not reach that issue, leaving open the possibility that a properly constructed SAFT distribution, where the second stage involves the sale of functional utility tokens, might indeed satisfy the requirements of federal securities laws.

Since the second stage of a SAFT offering does not involve reliance on an exemption that limits general solicitation, instead turning on a determination that the functional tokens are not securities, it should be possible to argue that the rationale and result of SEC versus Telegram and SEC versus Kik should not apply.