As the crypto market shifts from building mode back to fundraising and growth, more venture deals are emerging. Many of these are structured as Simple Agreements for Future Tokens (SAFTs), which are considered a more "crypto-native" approach to Web3 fundraising. In our previous articles about Web3 fundraising, we explored the nature of SAFTs and provided guidance for SAFT preparation, including a SAFT template.

SAFTs are relatively new compared to conventional SAFE (Simple Agreement for Future Equity) fundraising with side letter rights, which sometimes include tokens. As such, SAFTs involve more legal, tax, and compliance considerations that Web3 founders must take into account when raising funds. In this article, we'll examine these considerations more closely.

Key considerations when raising funds via SAFTs

For SAFT fundraising, the key considerations can be divided into three categories:

1. Legal considerations: These include securities laws, investor solicitation requirements, and investor accreditation criteria—all of which are necessary for participation in SAFT fundraising.
2. Tax considerations: These encompass the token's tax status and tax implications for raised funds. Given the uncertainties surrounding the tax status of tokens and digital assets—and considering that a SAFT is essentially a token pre-sale agreement—the income from token pre-sales may be treated as taxable in some cases.
3. Financial and sanctions compliance: This involves investor verification, source of funds analysis, and on-chain KYT (Know Your Transaction) checks when receiving funds in crypto.

Below, we'll examine the scope of questions that should be analyzed for SAFT fundraising, as well as the relevant jurisdictions where these questions should be considered.

Legal (securities) considerations

Almost all SAFTs are securities, as they offer the right to future profits in exchange for current investment. This means securities laws and regulations apply to SAFTs, leading to the following key questions:

• Is SAFT issuance allowed by law in the country where the Token company (TokenCo) is registered?
• What are the regulatory requirements for investor solicitation in the investor's country of residence? (This includes mandatory disclosures, regulatory filings, reporting, and limitations on the number of investors.)
• What accreditation criteria must investors meet to participate in SAFT fundraising?

Let's consider a hypothetical example: a TokenCo is registered in the British Virgin Islands (BVI), while SAFT investors are based in the United States. In this case:

• Legal advice should be obtained in the BVI to ensure the company can issue SAFTs with the specific token type and tokenomics.
• Legal advice should be sought in the US to ensure investor solicitation by the BVI company complies with US securities laws. This includes Regulation D (Reg. D) or Regulation S (Reg. S) filings with the SEC, required disclaimers in the SAFT and project presentations, and investor accreditation verification.

It’s important that you obtain advice from locally licensed professionals who have experience working with global businesses. You can obtain advice, opinions, and support on global matters all in one place via the Legal Nodes platform. Learn more about how here.

Since all SAFTs are securities, Web3 teams must carefully analyze legal requirements in both the jurisdiction where their TokenCo is registered and the jurisdiction of investors' residence.

Tax considerations

Currently, there is no universal certainty regarding the tax status of newly created tokens. Tax authorities may classify these tokens as virtual assets, digital goods, commodities, or online services, depending on their use cases and the rights they provide to holders. Consequently, various tax implications may arise in the jurisdiction where the token company is registered. A SAFT (Simple Agreement for Future Tokens) might be classified as a pre-sale of online services or digital commodities, potentially leading to the qualification of raised funds as taxable income. This differs from fundraising via SAFE (Simple Agreement for Future Equity) + Token Warrant, where raised funds are typically treated as non-taxable direct capital injections into the company.

Tax matters for SAFTs are more straightforward in offshore jurisdictions such as the Cayman Islands, BVI, and Panama—popular choices for TokenCo registration. These zero-tax countries offer tax certainty regarding the applicable rate for token pre-sale transactions, even if they're deemed taxable. However, if a Web3 team is considering signing a SAFT from a company registered in an onshore jurisdiction, they should seek tax advice. Additionally, investors may face tax implications in their jurisdictions of tax residency, as they're purchasing an investment contract with expectations of capital gains. This matter warrants further tax analysis in the investor's jurisdiction.

Financial & Sanctions Compliance Considerations

While legal considerations (securities) and tax considerations can lead to regulatory charges, fines, and refund obligations if breached, the consequences of violating financial and sanctions compliance requirements can be even more severe. Such violations may result in criminal liability for Web3 founders and builders. Therefore, when attracting SAFT investors, Web3 teams should carefully consider the following:

1. KYC checks

Conduct Know Your Customer (KYC) checks on SAFT investors to ensure they are not on sanctioned persons lists, are not politically exposed persons (PEPs), and do not reside in sanctioned countries.

KYC procedures involve analyzing investors' identification documents and collecting proof of residency. Lists of sanctioned countries can be found here: (the US (OFAC), UN, EU, UK; PEP status). Automated KYC solutions may be used to streamline this process.

2. Fund source checks

Verify the source of funds that investors intend to invest, ensuring they are not linked to money laundering, terrorist financing, tax evasion, or other illegal sources.

Source of funds checks typically involve clarifying how investors earned their funds and reviewing supporting documents (e.g., tax declarations, business ownership documents, asset disposal records). Accountants, auditors, and attorneys can usually verify these document proofs.

3. AML checks

Perform Anti-Money Laundering (AML) checks on investors' virtual assets and wallets.

As SAFTs are considered a Web3-native investment method, it's common for investors to use cryptocurrencies (often stablecoins).

Recently, regulators have begun blacklisting crypto wallets associated with illegal crypto platforms (e.g., darknet markets) and crypto anonymizers (e.g., mixers). Therefore, for crypto investments, it's highly recommended to use "Know Your Transaction" (KYT) solutions to verify the legality of investors' crypto funds.

SAFT Investor Onboarding Checklist

The overview of regulatory, tax, and sanctions compliance requirements explored in this article aims to help founders mitigate the risks of regulatory uncertainties and personal liability. Additionally, this overview helps projects avoid deal breakers and future banking issues by enabling Web3 founders to collect solid proof of their TokenCo's funding sources. Such documentation is typically required when opening business accounts on regulated crypto exchanges and when making payments to regulated vendors.

To help founders even more, we’ve created a checklist that is free to download and that neatly summarises all the important information in this article.

How Legal Nodes can support your fundraising strategy

Fundraising for Web3 projects involves navigating a complex legal landscape, especially when utilizing SAFTs. From securities laws and tax considerations to financial and sanctions compliance, Web3 founders must carefully structure their fundraising efforts to avoid regulatory hurdles and potential liabilities. Legal Nodes can assist you throughout this process by providing tailored support at every stage, from incorporating your TokenCo in the right jurisdiction to drafting and reviewing all necessary legal documents. Our platform brings together a global network of legal experts who specialize in Web3 fundraising, ensuring that your token distribution complies with the relevant laws and regulations.

If you're ready to start fundraising or want to streamline your existing strategy, contact Legal Nodes today. We'll help you build a comprehensive legal roadmap for your project, from incorporation to investor onboarding and beyond.