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SAFE (simple agreement for future equity)

A SAFE (simple agreement for future equity) is a standardized document used by startup companies for early-stage fundraising. A SAFE investment may convert to equity in the company in a future round of fundraising (Series A, for example) and does not give a SAFE investor a specific number of shares at the time of the investment. The price of shares owned by a SAFE investor are determined in the future round of fundraising.

The terms of a SAFE are intended to be balanced between the interests of the investors, and the founders or existing owners of the company, but a SAFE may not be appropriate for every early-stage company or investor.

The SAFE was created by Y Combinator, a well-known tech accelerator, in 2013.

In Texas, as in other states, a SAFE (simple agreement for future equity) is a financial instrument used by startups during early-stage fundraising. It allows investors to convert their investment into equity at a later date, typically during a future equity financing round such as Series A. The SAFE is not a debt instrument and does not provide investors with immediate equity or a promise of a specific number of shares. Instead, the number of shares and the price per share are determined during a subsequent financing round based on the terms set forth in the SAFE agreement. The use of SAFEs is subject to general contract law and securities regulations. Founders and investors in Texas should ensure that their SAFE agreements comply with federal securities laws and any relevant state securities regulations. It is advisable for parties involved in a SAFE investment to consult with an attorney to ensure that the agreement is fair, balanced, and appropriate for their specific situation, and that it adheres to all applicable laws and regulations.

Texas Statutes & Rules

Federal Statutes & Rules

Securities Act of 1933
This act is relevant because SAFEs are considered securities, and the issuance of SAFEs must comply with federal securities laws.

The Securities Act of 1933 was enacted to ensure that investors receive significant information regarding securities being offered for public sale, and to prevent deceit, misrepresentations, and other fraud in the sale of securities. A SAFE, as a security, must be either registered with the SEC or qualify for an exemption from registration requirements. The act requires disclosure of financial and other information to the potential investors; this process is known as registration. Exemptions from registration include private placements, small offerings, and transactions by an issuer not involving any public offering.

Securities Exchange Act of 1934
This act governs the trading, purchase, and sale of securities, including those that may be issued upon the conversion of a SAFE.

The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) to regulate the secondary securities market and ensure greater financial transparency and accuracy, prevent fraud, and to regulate the activities of brokerage firms, transfer agents, and clearing agencies. It also governs the disclosure of information by publicly traded companies. Companies with SAFEs that convert into equity may become subject to the reporting requirements under this act if they meet certain thresholds, such as having a certain number of shareholders and assets.

Jumpstart Our Business Startups (JOBS) Act
The JOBS Act is relevant as it provides exemptions that may apply to startups using SAFEs in their fundraising efforts.

The JOBS Act, enacted in 2012, is designed to encourage funding of small businesses by easing various securities regulations. It includes provisions such as Title III, which allows for a broader range of investors to participate in crowdfunding, and Title II, which lifted the ban on general solicitation for certain private placements. Startups using SAFEs may fall under these provisions when raising capital, allowing them to raise funds from a larger pool of investors without having to register the securities with the SEC.

Regulation D (Reg D)
Regulation D provides a series of exemptions from the registration requirements of the Securities Act of 1933, which may be applicable to companies issuing SAFEs.

Regulation D consists of Rules 504, 505, and 506, which provide exemptions from the registration requirements, allowing companies to raise capital through the sale of securities without the need to register with the SEC. Rule 506(b) and 506(c), for instance, are commonly used exemptions for startups raising capital through instruments like SAFEs. These rules have specific requirements regarding the types of investors that can participate, the amount of money that can be raised, and the disclosure of information to investors.