The SEC Office of Investor Education and Advocacy issued an Investor Bulletin on the risks associated with Simple Agreements for Future Equity ("SAFE") that are offered through crowdfunding. Unlike common stock, SAFE purchasers do not receive a current equity stake in a company. By contrast, a SAFE is an agreement to provide a future equity stake if a particular triggering event occurs. For that reason, the SEC cautioned that investors should pay particular attention to the terms of a given SAFE offering, since there is no guarantee that the necessary triggering event will occur.
The SEC warned investors to be aware not only of the triggering mechanism, but also of the following provisions of SAFEs:
- conversion terms;
- repurchase rights;
- dissolution rights; and
- voting rights.
The SEC noted that initially, SAFEs were developed to give sophisticated venture capital investors the opportunity to invest in "hot" startups while avoiding some of the prolonged processes associated with equity offerings. Since SAFEs are not standardized, it is important for investors to arrive at a detailed understanding of the terms of such offerings.
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