​​Safe and Sound? Examining How the Safe + Token Warrant Model Navigates Howey

Dan Quatrella


For many years, tensions have been rising between the cryptocurrency industry and the U.S. Securities and Exchange Commission (“SEC”) over the definition of a security and whether cryptocurrency tokens fall within that definition. No episode highlights this more than the enforcement actions brought against Telegram, Kik Interactive, and Ripple Labs. These projects made their best attempt to structure their early funding such that the cryptocurrency tokens they intended to launch would be shielded from both classification as a security and the corresponding requirements that would likely stifle their growth. The industry has concerns about the logistical consequences of SEC regulations on their early-stage products. Conversely, the SEC has an interest in regulating fraud in the new cryptocurrency sector. However, until Congress steps in and legislates, both sides are deadlocked; the SEC is trying to fit the “square peg” cryptocurrency into the “round hole” of the Securities Act of 1933.

An outgrowth of the SEC’s arguments in these cases has been a new structure for fundraising called the “SAFE + Token Warrant.” This Note will delve into: (1) explaining from first principles the value proposition of cryptocurrencies and decentralized computation networks to understand the goals of these protocols better; and (2) summarizing the back-and-forth between the industry and the SEC to clarify the industry’s attempts to navigate ambiguous regulatory frameworks. This background will provide the necessary context to analyze this current iterative attempt by the cryptocurrency industry to launch their novel products while navigating uncertainty in the securities laws. This Note will complete a comprehensive securities analysis of the SAFE + Token Warrant model and determine whether it accomplishes the startup’s goals in avoiding the classification of their tokens as securities. Finally, it will provide recommendations for resolving the present issues and present guidance on how cryptocurrency protocols can better mitigate regulatory risks during early-stage fundraising.