SAFTs (explained below) are a type of legal agreement for the sale of digital
tokens that originated in the USA in 2017. The fallout from the use of SAFTs is now starting to be seen in regulatory actions. This post explains the under-appreciated opportunity for civil actions by affected investors.
Many people bought into token projects in 2017-2018 using SAFTs and have suffered large losses. In some cases the investors may be able to recover their money through civil actions against the offerors, either in parallel or following up on, government efforts. This is a path to recovery that's received much less notice within cryptocurrency efforts than the high-profile cases brought by securities regulators, such as the ongoing Kin litigation (which involves a SAFT too).
What's a SAFT?
SAFTs are a type of investment contract popularized in 2017 and used to raise millions of dollars, largely from wealthy people in the crypto ecosystem. The original goals and documents were set out in a paper by several authors, including a partner at a major US law firm, Marco Santori. The SAFT document spread like wildfire within the crypto world, probably due to a combination of misunderstandings and the desire of crypto-focussed projects to raise money quickly using whatever document templates seem best (and closest at hand). Although some of these documents were used as intended, there were many companies that used this template (and its many variants) without understanding the consequences. The consequences are now starting to be seen in legal proceedings.
The SimplyVital Example
On August 12th the SEC published an administrative proceeding concerning a company named SimplyVital Health, Inc. that raised money through a token (HLTH) offering that they termed a
pre-sale and conducted using a SAFT-like document. The theory (in brief) behind SAFTs is that a security is offered now and then later it becomes a non-security token. What this can look like, and the legal ramifications of doing it the way many companies did, are given in the SEC order starting at paragraph 10:
SimplyVital failed to take reasonable steps to verify that purchasers of securities sold in its pre-sale offering were accredited investors. For example, SimplyVital was aware that a number of purchasers were pooling funds from various unknown individuals for the purpose of participating in the pre-sale, and it made no efforts to determine the accredited investor status of those participants in the pools. SimplyVital also permitted certain non-U.S. investors, who represented the majority of the ETH SimplyVital raised in its pre-sale, to purchase securities without SimplyVital or its agent undertaking any accredited investor verification.
11. In total, from September 25, 2017 to April 3, 2018, SimplyVital raised more than 15,200 ETH (equivalent to approximately $6.3 million USD as of April 3, 2018) from 52 individuals or ICO pools who invested through the company’s pre-sale. Of the more than 15,200 ETH raised, at least 13,800 ETH (more than $5.2 million USD) came from purchasers with whom the company had not taken reasonable steps to verify accredited investor status.
12. SimplyVital is a domestic corporation which advertised its offer of securities via a general solicitation to potential purchasers in the United States, including through internet postings and direct communication with U.S. persons. It also offered and sold these securities to persons in the U.S.
13. No registration statements were filed or in effect for SimplyVital’s offers and sales of securities, and the offers and sales did not qualify for any exemption from registration under the Securities Act.
Civil Liability & Recission for Pre-Sales
SimplyVital is a regulatory proceeding, but I expect that in many cases like this there is also an opportunity for private action by affected investors.
The most likely targets of private actions are token projects that sold securities without the appropriate securities work being done and then didn't return the invested money to the investors.
Given that many token-centered projects have failed, there may not be funds left to recover through civil actions. But in the cases where there is money left in the companies there's an opportunity for direct investor recourse through the legal system. The easiest cases will probably be those that follow regulatory actions so that the essential facts can be easily discovered.
The remedies for affected people in Ontario are found in Part XXIII of the Ontario Securities Act and may include rescission (getting the original money back) or damages. For those who've seen their original investment reduceed to a fraction of its value, rescission would be a great outcome.