Can SAFE Agreements Be Used in the Kingdom of Saudi Arabia?

SAFE (Simple Agreement for Future Equity) agreements have become one of the most widely used financing instruments for startups worldwide. They grant an investor a future right to receive shares in the company upon the occurrence of certain specified events, without requiring the company to be valued at the initial investment stage.

Despite the widespread use of this model globally, its application in the Kingdom of Saudi Arabia raises several regulatory questions, particularly with respect to the classification of the agreement under the Capital Market Law, and whether it may be offered to investors as an exempt offer under the regulations and rules issued by the Capital Market Authority (CMA).

It is important to note that the answer to this question does not depend on the name of the agreement or the template used, but rather on the nature of the rights granted to the investor, its legal terms, and the mechanism through which those rights are implemented.

Accordingly, before considering the use of a SAFE agreement as a financing instrument for a startup, two distinct legal questions must be addressed:

• Is the SAFE agreement classified as a security under the Capital Market Law?
• If so, can it be offered under one of the exempt-offer regimes provided for under the applicable regulations?

The answers to these two questions form the basis for the legal assessment of any financing transaction involving SAFE agreements in the Kingdom.

First: Is a SAFE Agreement Considered a Security?

This is the starting point for any legal analysis involving SAFE agreements, because the provisions governing exempt offers become relevant only if the investment instrument falls within the definition of a security.

The Saudi Capital Market Law identifies the types of rights and instruments that constitute securities, including shares, tradable debt instruments, investment fund units, rights associated with participation in profits or distributions of assets, as well as any other instruments that the Board of the Capital Market Authority may determine should be subject to the Law in order to protect investors and maintain the integrity of the market.

At the same time, the Law excludes certain commercial and financial instruments from this classification, such as cheques, bills of exchange, promissory notes, documentary credits, money transfers, and insurance policies.

The Substance of the Agreement, Not Its Name, Is the Relevant Test

One of the most common misconceptions is that labeling an agreement as a “SAFE” automatically gives it a particular legal classification. The regulatory position, however, is quite different.

Regulatory authorities do not focus merely on the title of the agreement. Rather, they examine its substantive provisions, the rights it creates, and the obligations arising from it.

Accordingly, if the agreement grants the investor a future right to acquire shares upon the occurrence of a specified event, or grants the investor economic rights linked to the value of the company, its returns, sale proceeds, or liquidation proceeds, it may fall within the concept of a security depending on its legal substance.

Conversely, if the traditional SAFE model is modified by incorporating elements that make the relationship more akin to debt financing—such as specifying a maturity date, granting the investor a right to demand repayment of the invested amount, or imposing a repayment obligation on the company—the agreement may, in substance, more closely resemble a debt instrument, even if the parties continue to refer to it as a “SAFE.”

For this reason, no general determination can be made with respect to all SAFE agreements. Each agreement must be assessed individually, with its provisions and the rights granted to the investor carefully analyzed in order to reach the correct regulatory classification.

Second: What Is Meant by an Exempt Offer?

Once it has been determined whether a SAFE agreement constitutes a security, the analysis moves to the next question: can it be offered under one of the exempt-offer regimes?

An exempt offer refers to certain offers of securities that may be exempt from compliance with some of the regulatory requirements set out in the Rules on the Offering of Securities and Continuing Obligations, provided that the conditions prescribed by the Rules are satisfied.

However, such an exemption does not mean that the security falls outside the scope of the Capital Market Law, nor does it mean that the Capital Market Authority loses its regulatory jurisdiction over the transaction.

Rather, describing an offering as “exempt” presupposes that the instrument being offered constitutes a security and remains subject to the applicable regulatory framework, while benefiting from a different regulatory route that reduces certain offering requirements.

Accordingly, two distinct concepts must be distinguished:

• The classification of the investment instrument as a security.
• The regulatory mechanism through which that security is offered.

An exempt offer therefore concerns the regulatory procedure, not the legal nature of the investment instrument.

Why Is This Distinction Important?

Some entrepreneurs mistakenly believe that including a statement such as “this offering is exempt from registration” in the agreement is sufficient to remove the transaction from the regulatory oversight of the Capital Market Authority.

The regulatory position, however, is different.

The regulatory status of an offering is not established merely by including such a statement in the contract. Rather, it is determined by whether the company has complied with the regulatory conditions applicable to exempt offers and whether the financing structure is consistent with the Capital Market Law and its implementing regulations.

Accordingly, assessing the legality of using a SAFE agreement does not begin with drafting the contract. It begins with examining the nature of the agreement, the financing structure, the manner in which the investment is offered to investors, and compliance with all relevant regulatory requirements.

Third: What Are the Requirements for Offering a SAFE Agreement as an Exempt Offer?

Once it has been determined that a SAFE agreement may, depending on its substance, constitute a security, the most important question for startups and investors is whether the exempt-offer regime can be relied upon when using such an agreement.

The answer is yes, in principle, but not merely by selecting a SAFE template or stating in the agreement that the offering is “exempt.” Rather, eligibility depends on satisfying all applicable regulatory requirements set out in Article 6 of the Rules on the Offering of Securities and Continuing Obligations.

Failure to satisfy any one of these requirements may prevent the offering from benefiting from this regulatory route, even if all other requirements have been met.

First Requirement: The Total Value of the Offering Must Not Exceed SAR 10 Million

The maximum offering size is one of the key requirements governing exempt offers.

This means that the aggregate subscription value of all securities offered must not exceed SAR 10 million, or its equivalent.

A particularly important practical point should be noted here.

The relevant criterion is not the amount invested by each individual investor, but the aggregate size of the entire offering.

Accordingly, if a company enters into several SAFE agreements as part of a single investment round, or if all such agreements relate to the same financing objective and contain substantially similar terms, their values may be aggregated when determining whether the regulatory threshold has been exceeded.

Therefore, a company should not treat each SAFE agreement separately if, in substance, all such agreements constitute part of a single financing round.

The assessment should be based on the economic substance of the transaction, rather than the number of contracts or the manner in which they have been divided.

Second Requirement: No Repeat Offering Within Twelve Months

The regulatory framework does not address the value of the offering alone; it also addresses its timing.

In order for an offering to benefit from the exemption, the company must not conduct another offering of the same type during the twelve months following completion of the offering.

This requirement is intended to prevent circumvention of the prescribed monetary threshold by dividing a large investment round into several smaller, consecutive offerings in order to remain below the SAR 10 million ceiling.

For this reason, the company should maintain a clear record containing:

• The date on which the offering commenced.
• The date on which the offering ended.
• The aggregate financing amount.
• All investment instruments issued as part of the round.
• Any related offerings conducted before or after it.

Such documentation helps demonstrate the independence of each financing transaction when required and assists in evidencing the company’s compliance with the applicable regulatory requirements.

Third Requirement: Maximum Number of Persons to Whom the Offering May Be Made

The regulatory framework also requires that the number of persons to whom the investment is offered must not exceed 50 persons, excluding Qualified Clients and Institutional Clients.

An important distinction is often overlooked by entrepreneurs.

The relevant number is not the number of investors who ultimately complete the investment, but rather the number of persons to whom the investment opportunity was initially offered.

For example, if a startup offers an investment opportunity to 80 ordinary investors, but only 20 of them ultimately agree to invest, the company may still face a regulatory issue because the relevant consideration is the number of persons who received the offer, rather than the number who actually subscribed.

Qualified Clients and Institutional Clients are not included in this numerical limit in accordance with the applicable rules.

Companies should therefore document the list of persons to whom the offer was made, rather than maintaining only a list of investors who executed the agreements.

Fourth Requirement: Maximum Investment by an Unqualified Investor

Compliance with the investor-number limit alone is not sufficient. The maximum amount that may be invested by each unqualified investor must also be taken into consideration.

The applicable regulatory rules provide that the investment amount paid by each Unqualified Investor or non-institutional investor must not exceed SAR 200,000, or its equivalent.

Qualified Investors and Institutional Investors are not subject to this particular limit; instead, the provisions applicable to their respective classifications apply.

This requirement is intended to limit the exposure of individual investors to the higher investment risks associated with startups, which by their nature may involve greater levels of risk than traditional investments.

Fifth Requirement: Obtaining a Risk Acknowledgment

A risk acknowledgment is one of the key requirements aimed at protecting investors and should not be treated as a mere formality or as a document to be signed alongside the remaining transaction documents without due consideration.

Each unqualified investor participating in the offering must provide an acknowledgment confirming that the investor has reviewed and understood the risks associated with the investment.

Among other matters, the acknowledgment should confirm that the investor understands that:

• The investment may result in the loss of the entire amount invested.
• The Capital Market Authority does not approve or guarantee the accuracy or completeness of the offering documents.
• The Authority assumes no responsibility for any losses arising from or resulting from reliance on the information contained in those documents.
• The offeror is not required to notify the Authority as to whether the investment is suitable for the investor.

As a matter of good practice, the acknowledgment should include the investor’s details, the investment amount, the type of security, and the date of execution, so that it forms part of the offering file and can be referred to when necessary.

Is It Sufficient to State in the Agreement That the Offering Is Exempt?

Some parties believe that including a statement such as:

“This offering is exempt from registration requirements.”

is sufficient to establish the offering’s regulatory status.

This assumption is inaccurate.

An exemption does not arise merely from the wording of the agreement. Rather, it is determined by whether the offering complies with the conditions established by the applicable laws and regulations.

In other words, the legal reality of the offering determines whether it qualifies for an exemption; contractual wording alone does not.

Accordingly, a company should obtain a comprehensive regulatory assessment before offering SAFE agreements rather than relying solely on the inclusion of legal language in the contract.

Does an Exempt Offer Remove a SAFE Agreement from the Jurisdiction of the Capital Market Authority?

One of the most common misconceptions is that an exempt offer means that the investment transaction falls outside the regulatory oversight of the Capital Market Authority. This interpretation does not accurately reflect the regulatory framework applicable in the Kingdom.

An exempt offer is a regulatory route that reduces certain requirements applicable to securities offerings. It does not alter the legal nature of the investment instrument or exempt it from the laws and regulations applicable to it.

Accordingly, if a SAFE agreement is classified as a security, its offering—even if conducted as an exempt offer—remains subject to the jurisdiction of the Capital Market Authority and to the regulatory provisions governing securities.

In other words, the exemption relates to the offering procedures, not to the classification of the investment instrument or the regulatory authority responsible for supervising it.

What Does an Exempt Offer NOT Mean?

To understand the regulatory framework more accurately, it is necessary to distinguish between an exemption from certain offering procedures and an exemption from the application of the laws themselves.

An exempt offer does not mean that:

• The SAFE agreement becomes an ordinary commercial contract outside the scope of securities regulation.
• The agreement ceases to constitute a security if it satisfies the elements of such classification.
• The Capital Market Authority loses jurisdiction over the investment transaction.
• The provisions of the Securities Business Regulations or Capital Market Institutions Regulations cease to apply.
• Regulated activities may be carried out without obtaining the required regulatory licenses where the nature of the activity requires such licensing.
• The issuer is relieved of liability for any false, misleading, or incomplete information provided to investors.

Accordingly, the more accurate regulatory description is that the security remains a security, while the exemption is limited to certain offering requirements to the extent permitted by the applicable regulations.

Is the Capital Market Authority Required to Be Notified of an Exempt Offer?

Although the offering may benefit from an exemption from certain procedures, this does not mean that regulatory obligations are eliminated.

The applicable rules require the offeror, or the Capital Market Institution responsible for managing the offering, as applicable, to periodically notify the Capital Market Authority of exempt offers conducted during the relevant period.

This requirement enables the Authority to monitor offerings conducted in the market and ensure continued compliance with the applicable regulatory controls.

The notification generally includes key information regarding the offering, such as:

• The number of offerings conducted.
• The aggregate value of each offering.
• The regulatory category relied upon for the exemption.
• The categories of participating investors.
• The amounts invested.
• The commencement and completion dates of the offering.
• Details of the issuer and offeror.
• The type of security.
• The investment price.
• The total offering size.
• Investors’ risk acknowledgments.

This confirms that an exempt offer is not an informal financing transaction. Rather, it remains subject to regulatory requirements that necessitate maintaining records and documentation that may be reviewed when required.

What Should a SAFE Offering File Contain?

Before approaching investors or commencing the fundraising process, it is sound legal practice to prepare a comprehensive offering file containing all documents and records relating to the investment transaction.

Such a file helps demonstrate the company’s compliance with regulatory requirements and facilitates the handling of any future regulatory reviews or inquiries.

At a minimum, the file should preferably include:

• The company’s resolution approving the issuance of the investment instrument and the implementation of the financing round.
• A legal memorandum setting out the regulatory basis for classifying the SAFE agreement and the reasons for relying on the exempt-offer regime.
• The final approved version of the SAFE agreement.
• A statement specifying the maximum aggregate offering value.
• A record of the names of all persons to whom the offer was made.
• The regulatory classification of each investor.
• The proposed investment amount for each investor.
• Risk acknowledgment forms for unqualified investors.
• A record showing the dates on which offers were made, agreements were executed, and financing was received.
• Evidence that no other offering was conducted in breach of the twelve-month restriction.
• The information required for periodic notification to the Capital Market Authority.
• Internal controls designed to ensure that the regulatory limits relating to the offering value, number of investors, and individual investment amounts are not exceeded.

Preparing this file from the outset reduces regulatory risks and demonstrates a high level of corporate governance and compliance.

Can a Financing Round Be Divided into Several SAFE Agreements?

Some companies may seek to divide a single financing round into several groups of SAFE agreements, with each group falling below the monetary threshold applicable to exempt offers.

However, the regulatory assessment does not depend on the apparent form of the contracts, but rather on the substance of the underlying economic transaction.

If the agreements share common elements, such as:

• Being executed within the same period.
• Relating to a single financing objective.
• Using the same contractual template.
• Having substantially identical commercial terms.
• Targeting the same category of investors.
• Forming part of a single investment round.

they may be treated as a single offering when assessing compliance with the applicable regulatory requirements.

Accordingly, contracts should not be divided as a means of circumventing the controls governing exempt offers.

What Is the Role of Capital Market Institutions in SAFE Offerings?

It is also important to distinguish between a company directly issuing a SAFE agreement to its investors and another person or entity carrying out activities relating to arranging, marketing, or managing the investment process.

Such activities may include:

• Introducing investment opportunities.
• Promoting startups to investors.
• Arranging securities issuances.
• Negotiating between investors and the issuer.
• Receiving financial consideration linked to the completion of investment transactions.

Some of these activities may constitute securities business activities requiring the relevant regulatory license.

Accordingly, the fact that an offering qualifies as an “exempt offer” does not exempt intermediaries, arrangers, or parties involved in structuring the investment from applicable licensing requirements.

Is Compliance with the Exempt-Offer Requirements Sufficient?

Even if a SAFE agreement satisfies all requirements applicable to an exempt offer, another equally important legal issue remains: whether the company is legally authorized to issue the investment instrument in the first place.

The offering regulations govern how a security may be offered, but they do not grant a company the authority to issue instruments that are not permitted by its constitutional documents or legal form.

Accordingly, a number of matters should be reviewed before issuing the agreement, including:

• The company’s legal form.
• Its Articles of Association or bylaws, as applicable.
• The powers of its managers or board of directors.
• The internal approvals required for issuing the agreement.
• The company’s ability to issue shares upon conversion.
• The rights of existing partners or shareholders.
• The impact of the agreement on the ownership structure and capitalization table.

Conclusion

SAFE agreements have become one of the leading financing instruments for startups. However, their use in the Kingdom of Saudi Arabia requires careful regulatory analysis before they are adopted.

The key consideration is not the name of the agreement, but rather the nature of the rights it grants to the investor and whether those rights result in the agreement being classified as a security under the Capital Market Law.

If the analysis concludes that the SAFE constitutes a security, it may be possible to offer it as an exempt offer, provided that all applicable regulatory requirements are satisfied, including the limits on the offering value, number of investors, maximum individual investment amount, risk acknowledgment requirements, and other applicable regulatory obligations.

Conversely, describing an offering as “exempt” does not remove the agreement from the jurisdiction of the Capital Market Authority or relieve the company of its obligations under the applicable laws and regulations.

Accordingly, the proper legal approach is not to modify the title of the agreement or simply adopt a foreign template. Rather, it is to design a comprehensive legal structure that takes into account the nature of the investment instrument, the mechanism through which it is offered, and all applicable regulatory and legal requirements. This approach helps strike an appropriate balance between the financing needs of startups and the protection of investors, while mitigating potential legal and regulatory risks.