---
title: 2.8 Legal Pathways and Project Design
description: Pragmatic expectations on the implications of different legal pathways
---

# 2.8 Legal Pathways and Project Design

This final lecture is a practical lecture at root, that seeks to ground expectations on the implications of different legal pathways taken by projects building in an L1 ecosystem. It is an understatement to say that crypto is a gray zone area. The focus however is not legal council nor legal advice: It is practical insights that must be considered based upon the type of project in question, and the different legal jurisdictions that a project might choose. In this sense, the goal is to be able to understand the _implications_ of the different legal decisions a project might take - from a crypto perspective. 

## Initial Considerations: Location and Fundraise Structure

While many entrepreneurs are quick to understand traditional equity raise strategies, crypto challenges cross-over entrepreneurs (from Web2 or whatever other industry into Web3) with its complex legal framework. If a company is intending to launch a token as a part of their project, they must either clarify the status of their token with the SEC _or_ file for an exemption (under a Reg. D filing) - this is if the project is launching from the United States or if it intends to raise in relation to USA investors. The problem from a glance is actually twofold: 



1. What happens if a project is not sure if they would like to launch a token or not? 
2. Does the type of vehicle impact a project’s ability to get investors to be able to participate in their project? 

Both of these questions must be carefully considered _before a project moves forward with a specific approach_. To date there are three primary legal raise strategies that most projects fall into: (1) SAFT - or simple agreement for future tokens, (2) Token SAFE and Warrant → Simple Agreement for Future Equity (capable of being converted into tokens), and (3) Equity. 

## SAFT

A Simple Agreement for Future Tokens (SAFT) is a investment contract that was originally popular from 2017 to 2021, used to sell tokens to investors in the pre-sale of a project, prior to its public launch (ICO). 

A SAFT is a type of agreement between an investor and a project or company that is issuing a cryptocurrency or token. The SAFT is designed to provide investors with the rights to receive tokens at a future date, once the token is fully developed and released on the market. The terms of the SAFT typically outline the rights and obligations of both the investor and the issuing company, as well as the conditions under which the tokens will be delivered to the investor. The SAFT is intended to provide a simple and straightforward way for investors to participate in a pre-sale or ICO, while also ensuring that the issuing company is able to develop and release its tokens in a responsible and compliant manner.

In practice, a SAFT is a guarantee for tokens, and only tokens. There is no control an investor may possess over the behavior of the company, the management of funds, and so forth unless it is specified in a side letter or in the SAFT itself. This type of vehicle is ideal for protocols, or projects whereby the team intends to cede ultimate control over to the community later in time, and whereby they have a clear crypto-economics already developed. 

When compared with a token SAFE and warrant, a SAFT is less constraining for a project, but requires a clearer and more sophisticated crypto-economic design. 

The danger of a SAFT is that if the company structures offshore or through a Swiss Foundation (with a relevant token categorization from its regulatory body FINMA), then the project could in principle launch a token with limited responsibility in the long term, and then proceed to refuse to cede ownership of the private keys controlling the core facets of the protocol. 

## Token SAFE and Warrant

A SAFE (simple agreement for future equity) is a type of investment contract that is often used in crowdfunding campaigns, particularly in the tech industry. A SAFE is similar to a convertible note in that it provides investors with the right to receive equity in a company at a later date, typically when the company raises a certain amount of funding or reaches a specific valuation. However, unlike a convertible note, a SAFE does not accrue interest or have a maturity date.

A warrant is a financial instrument that gives the holder the right, but not the obligation, to purchase a specified number of shares of stock at a specified price within a specified time period. In the context of a crypto fundraising, a token warrant would be issued to an investor along with a SAFE for the right to tokens at a future date - if such a token would be launched. Technically, the warrant would give the investor the right to purchase additional tokens of the company's stock at a future date, typically at a discounted or fixed price. In practice, the company transfers the money ahead of time, and owns the right to a certain amount of tokens, whenever they are to be created. 

The combination of a token SAFE and a warrant can provide investors with an attractive investment opportunity from a tax and legal perspective, as the investing entity does not actually control or own the tokens themselves - but rather they ability to redeem their investment for tokens at a later date (should a token be launched). 

A token SAFE and Warrant structure can, however, be a danger for investors, despite its tax and legal benefits: Because crypto is centered upon the fundamental design of monetary systems built into smart contracts, the nature of the token is extremely important from an investment perspective. With a token SAFE and Warrant however, teams have the ability to sell investors on a vision or product _without specifying how that product or vision will be connected to a clear token-economic design_. As such, investors often create massive blunders insofar as they invest in a promising concept or prototype, and then come to find the token design is not able to accrue any of its value! 

For projects, a token SAFE and Warrant is sometimes (sadly) used to kick the can down the road for the design of their crypto-economic system: A project can quickly and easily raise funds without needing to get into the nitty-gritty of how their open, permissionless system is leveraged to accrue value. 

## Traditional Equity Vehicles Holding Tokens Offshore

Last but not least, there is the option of creating a traditional equity investment vehicle. This is characteristically used for infrastructure, security, custody, and on-ramp projects that may or may not intend to launch a token. This is similar to traditional tech investing, and largely depends on the jurisdiction in which the entity intends to operate. Popular destinations include the Cayman Islands, Switzerland, Hong Kong, Singapore, as well as Antigua and Barbuda. If there is a potential for the nature of the project to intersect with the regulation of the United States as it pertains to token design and functionality, it is best for the company to be structured offshore. 

From an investment perspective, traditional equity vehicles are often-times used to allow more legacy investors or corporations to invest or participate in a token sale, by holding the tokens inside of an offshore company, and selling equity of that company to the corporation in question. 

**Hypothetical Example:** KDDI is a Japanese corporation that has set up an offshore entity. A protocol then would sign a SAFT or SAFE with that offshore entity, from which it could deploy tokens. These tokens would then be owned (once-removed) by KDDI, such that they would be able to control them through the Cayman Entity. However on KDDI’s balance sheet it simply shows an equity investment in a Cayman entity. 

## Token Considerations and Jurisdictions

Without touching too much upon the field of crypto-economics, projects and investors must also always consider the legal implications and designation of a token that a project launches. According to Swiss regulation there are three types of tokens: 

1. Utility Tokens. 
2. Payment Tokens.
3. Security Tokens. 

To receive this designation, a project would need to structure an LLC or Foundation inside of Switzerland and register their supposed token design for approval from FINMA. 

Any entity launching a token from offshore, would not need to worry about their token designation, unless they intended to sell or launch to the United States market of investors and retail users (discussed below). Offshore entities would only be limited by the jurisdiction they launch within - which to date has zero regulations on token designations. It would then be a question for exchanges or custodians wishing to list that token if it is acceptable within specific jurisdictions. 

From an investor’s point of view, the investor must understand the roadmap and development timeline of the project, as well as the utility of the token they may be investing in. This is surprisingly not done frequently or well. 

## Governance Tokens and their Critics

One strategy that has been leveraged by founders revolves around ‘governance tokens’. The strategy is quite straightforward: If a token is going to be receiving value from an external source, it is most likely to be considered a security token. This would apply to most fee-sharing protocols relevant to Decentralized Finance and NFT marketplaces. Teams then do the following: 

* Launch Governance Token Offshore (or as Anonymous Team). 
* ‘Decentralize’ the protocol after the token has been launched (and even listed on an exchange). 
* Add fee accrual to the governance token, as a protocol wide decision or vote, such that it functions as a security token, even though it is considered as being created for governance. 

Often times, however, this strategy is not developed fully or to its completion, resulting in the launch of a token that merely has rights to vote on mechanical changes to the protocol over time. Vitalik as been outspoken on the silly nature of value capture in these token designs: 


![](@site/static/img/bootcamp/mod-em-2.8.1.png)


## Regulation D filing and sales in the United States

Regulation D is a rule under the Securities Act of 1933 that provides an exemption from the registration requirements of the Act. This allows a company to raise capital from investors without having to register their securities with the Securities and Exchange Commission (SEC). In the context of token offerings, a company would use a Regulation D to offer and sell tokens without having to register the offering with the SEC. This can be a useful way for companies to raise capital while still complying with the law. 

However, it's important to note that there are limitations and requirements that must be met in order to qualify for the exemption under Regulation D. For example, the tokens being offered must be offered only to accredited investors, and there are limits on the amount of money that can be raised through a Regulation D offering. 

Details aside, a Regulation D filing is necessary for most projects intending to offer their token to accredited investors inside of the United States. If a project is selling to USA investors, they have a choice to comply with the Reg D filing requirements, or to simply launch as an anonymous team. In the former case, the project is responsible (despite most likely being structured offshore), in the latter case the investors are taking on additional risk, investing in a protocol or project that is not legally structured or compliant in the USA. 

## Takeaways

Amidst all of the legal mumbo-jumbo there are some very practical takeaways from investors and projects to understand: 


1. If your project has a token, you must think carefully about (1) If you are launching it offshore or through some regulated jurisdiction (like Switzerland), (2) If you will raise as SAFT, Token SAFE and Warrant, or Equity - and the implications of that for your crypto-economics. (3) If you are selling to USA investors, and you intend to comply with the minimum registration requirements from the SEC. 
2. Investors need to look carefully at the crypto-economic design, rights to the company, and designation of the token. Otherwise they may be investing in vaporware! 
3. Projects must understand the timeframes and implications of (1). Certain types of tokens cannot be listed on certain exchanges, while selling to USA investors under a Reg. D filing may have a limitation on where and when the token can be offered to retail at a later point. 
4. At the end of the day, there is no ‘global jurisdiction’. The FTX fallout, 3AC going to Dubai, and limited reach from governments, shows that in the crypto space, a lack of global regulation and coordination leaves the door open to maneuverability on behalf of projects and founders, that has been hitherto unprecedented.