Investing in ICOs and SAFTs
Investing in ICOs and SAFTs is not a simple process. If you’re not an accredited investor it’s even more complicated as only accredited investors are permitted to invest in ICOs. The qualifications to be an accredited investor would peg you as rich in terms of either a $200,000 annual income for the past two years ($380,000 for a married couple) OR a net worth not less than $1 million.
Startups are raising funds by creating and selling their own digital “tokens” or “coins,” using blockchain technology, that serve as the payment mechanisms within their products. The tokens have an advantage over regular money in part because startups can program simple rules for them that go beyond mere currency of a kind but to actually guide product functionality by using such cryptocurrency within the product itself, such an app.
Blockchain brings its own set of advantages independent of investing in ICOs and SAFTs themselves.
Investors buy digital tokens from startups in hopes the value will rise as the startup adds customers and builds revenue. The tokens are artificially limited in quantity, so the value of each token increases as demand increases. Customers of the startup won’t notice the rise in token value because prices within the product are based on the value of conventional currency. Otherwise stated, if one token is worth a dollar today, but worth ten dollars tomorrow, the startup auto-adjusts the price within the product to be 10% of a token to compensate.
SAFT tokens are seen as a simplified way for startups to sidestep standard ICO regulations. For mind-numbing, even eye-watering examples of this feel free to research the finer points of SEC Regulation D Offerings via Rules 506(b) and 506(c) which are limited to accredited investors, or in the case of 506(b), additionally up to 35 sophisticated investors. However, an alternative is possible — crowdfunding up to $1.07M/12 months under Regulation Crowdfunding (RCF) which allows unaccredited and unsophisticated investors (or perhaps under SEC Rule 504).
Everybody got all that? That’s the basis for SAFTs being more appealing to startups in raising necessary capital without all of the hoops and hidden pitfalls of a standard ICO offering. More importantly, startups can gain access to a wider base of investors since accredited investors, by definition, tends to be a club with somewhat exclusive membership.
So how does investing in ICOs and SAFTs make any money for the investor? Tokens can easily be exchanged for Bitcoin or cash on cryptocurrency exchanges.
For the avoidance of doubt, ICOs and SAFTs are not investments in the purest sense of the word and owning such coins don’t confer equity ownership. Their appeal is in providing an easy path to share in whatever success the startup experiences which is something that was reserved for the ultra-exclusive angel investors club up until now.
Is investing in ICOs and SAFTs something you should do? Quite possibly. Just make sure you acquire and assimilate all of the material available on any given offering and make an informed investment decision just as you would with an IPO on the stock market with the full knowledge that your money is on the line with all of the risks and rewards that may come.