The sudden collapse of FTX sent shockwaves throughout the crypto ecosystem. It ignited dozens of marbled legal skirmishes and roused a fog of monetary doubt. NFT Star and Delysium now reportedly are tied up in complex legal conflicts involving FTX. Both firms are currently being sued for signing on to joint agreements worth up to 96 million dollars worth of digital tokens. These lawsuits showcase how tricky crypto fundraising can be. Further, they lay bare the dangers associated with raising capital through Simple Agreements for Future Tokens (aka SAFTs). DeliciousNFT.com is continuing to look closely into these cases. They’re dishing out the real sting of what it all means and uncovering what it means for the future of Web3.

Understanding SAFTs: A Risky Fundraising Tool

We SAFT is an acronym for Simple Agreement for Future Tokens. Let’s dive into what DeFi is and how helpful it can be to understand its place in the crypto world. A Simple Agreement for Future Tokens (SAFT) is an investment contract between a blockchain project and an accredited investor. The project developer executes an agreement through which the investor provides initial capital to the project. In return, they get a fixed number of the project’s tokens when it hits specific milestones or launches its mainnet.

SAFTs are usually employed in the seed rounds of fundraising. These types of agreements are typically signed six to twelve months in advance of the token actually launching. They enable projects to raise capital before launching a project or platform, granting them the initial funds needed to build out their platform or technology. SAFTs are not without their risks. For investors, the value of the tokens they might receive poses no issue outside of their project’s success. If the project does not get off the ground or the tokens are not successful, the investor will lose their entire investment.

SAFTs provide a rapid and streamlined means of raising capital to establish projects. They must assume the burden of being held accountable for fulfilling those promises. Neglecting to understand this across the crypto ecosystem risks being brought to full and unfortunate focus on the legal actions we’re currently witnessing with FTX lawsuits.

Key Considerations for SAFT Agreements

  • Investor Representations: A SAFT agreement requires the purchaser to acknowledge their authority to enter into the contract, meet the criteria for purchasing the security, and accept responsibility for their decision.
  • Accredited Investors: SAFTs are generally only available to accredited investors, which include institutional investors or individuals with a net worth exceeding $1 million and an annual income above $200,000. This restriction aims to protect less sophisticated investors from the risks associated with early-stage crypto investments.
  • Lock-up Period: A common feature in SAFTs is a lock-up period, designed to prevent investors from immediately selling their tokens upon receipt and potentially crashing the token's price. A typical lock-up period might be one year, followed by monthly vesting over the subsequent year. This ensures a more gradual distribution of tokens and helps stabilize the market.

FTX vs. NFT Star: The SENATE Token Saga

The most high-profile case so far has been FTX’s lawsuit against NFT Star over its SENATE token. The crux of the lawsuit is a SAFT agreement between FTX and NFT Star. As part of this arrangement, FTX funded the entire project and expected to receive a certain number of SENATE tokens in return. Following the disastrous collapse of FTX, the now-defunct exchange is in search of a treasure—its mission to reclaim assets. Specifically, they allege that NFT Star breached its contractual obligations under the SAFT agreement.

These legal arguments center on whether NFT Star failed to provide the tokens as offered in the NFT. They allege that FTX should be allowed to recover its investment due to the project’s alleged contract violations. This case raises complicated jurisdictional issues, stemming from FTX’s international operations and the decentralized nature of the crypto industry.

The defense initially argued that FTX's terms of service were governed by English law due to FTX's Bahamas headquarters. The court found this argument unpersuasive, emphasizing the difficulties of establishing jurisdiction in cases concerning international crypto operations. This ruling highlights the difficulties of applying traditional legal frameworks to the rapidly changing world of digital assets.

FTX vs. Delysium: SIDUS and AGI Tokens in the Crosshairs

Similar to its lawsuit with NFT Star, FTX is suing Delysium over this matter. Delysium had signed a SAFT agreement with the exchange. This litigation involves the SIDUS and AGI tokens. FTX is seeking to recoup its investments, alleging breaches of contract and failure to provide the agreed upon tokens.

Indeed, the specifics of the Delysium example read almost identically to those in the NFT Star suit. FTX contends that Delysium neglected or otherwise didn’t fulfill its commitments specified in the terms of the SAFT agreement and the exchange now wants to recover its investments. The legal arguments and jurisdictional issues would be the same, but all the more complicating the case.

These lawsuits are not isolated incidents. As we all know, FTX is in the middle of Chapter 11 bankruptcy proceedings. It obtained a federal automatic stay against creditor actions, including those by investors, giving the company significant legal breathing room to work through these claims. To be eligible for the FTX lawsuit, plaintiffs need to have purchased crypto through FTX. They have to have suffered financial losses of at least $10,000. In May 2023 the U.S. JPML held oral arguments on whether to create a national MDL for Juul. They sought to consolidate the mounting financial loss claims from customers impacted by the failure of FTX, demonstrating its far reach.

Implications for Other Companies and the Crypto Industry

These lawsuits would be a significant blow to other firms that had negotiated similar sweetheart deals with FTX. More importantly, they set some critical challenges for the whole crypto industry. Businesses associated with FTX could face reputational harm due to their relationship with the failed exchange. That leads to a degradation of customer confidence and eventual demise of their business.

In all probability, companies with similar arrangements with FTX bought massive amounts of FTT tokens or other assets. These investments have completely lost value, leaving many to suffer major capital losses. Otherwise they might face increased regulatory oversight. This is particularly the case where they may have commingled customer funds or neglected to put in place faculties of corporate oversight. Creditors, customers, and investors who lost money because of FTX’s abrupt collapse present an almost unavoidable risk of litigation. Their possible litigious steps are indeed the biggest worry for us.

FTX’s collapse has the potential to create a devastating domino effect throughout the cryptocurrency sector. Those companies that share the same business models or partnerships are likely to be hit the hardest. This serves as an important reminder of how interconnected the crypto ecosystem is, and how easily systemic risk can spread.

Potential Impacts on the Web3 space

  • Reputational Damage: Association with FTX can tarnish a project's image, leading to a decline in user trust and adoption.
  • Financial Losses: Investments in FTT or other FTX-related assets may have resulted in significant losses for companies.
  • Regulatory Scrutiny: Increased oversight from regulatory bodies can lead to higher compliance costs and potential penalties.
  • Litigation Risk: Lawsuits from investors and creditors can drain resources and create uncertainty.
  • Contagion Effect: The failure of one major player like FTX can trigger a domino effect, impacting the entire industry.

The Path Forward: Navigating the Regulatory Landscape

Whether or not the FTX lawsuits ultimately succeed, they send a clear message that the crypto industry needs more regulatory clarity. The fight is intensifying around how the digital currencies should be regulated. Should the Commodities and Futures Trading Commission (CFTC) regulate them as commodities, or should the Securities and Exchange Commission (SEC) regulate them as securities?

The lack of clear regulatory guidance has left a gap. Given a lack of any sort of meaningful oversight with varying degrees of guidance or control, this leaves the door open for companies to defraud and harm investors. As the crypto industry matures, it is essential that regulators develop clear and consistent rules to protect investors and ensure the stability of the market.

These cases reflect the great dangers associated with investing in crypto. They address the challenges head on, highlighting the absolute importance of rigorous due diligence. This means investors need to thoroughly investigate the projects in which they plan to invest. They must be able to fully articulate what they’re agreeing to. Projects, on the other hand, should prioritize transparency and accountability to build trust with their investors and avoid legal pitfalls. DeliciousNFT.com will continue to monitor these developments and provide you with the latest insights into the evolving world of Web3.