IRS Code 1202 exempts gains on qualified small business stock held five years or longer, capped at $15 million. SAFEs claiming QSBS treatment are problematic because they lack voting rights and aren't true equity, making the tax benefit assertion legally weak.
So IRS Code 1202, just in brief, it's a code that says if you own stock in a C corporation and you meet other requirements, if you hold that stock for at least 5 years, when you sell, the gain on the sale of that stock is tax-free up to a cap of $15 million or 10x what you paid. It's a huge tax break. And then it was also amended last year that if you only hold for 4 years or 3 years, you get a tiered-down benefit on the tax. So you have to hold stock in a C corp for it to trigger. The SAFE in the last paragraph claims that it is treated as equity under a number of IRS codes, including IRS Code 1202. So when a policeman pulls me over on the freeway and says, "You were speeding," I say, "No, I wasn't. I was going 55. Can't write me a ticket." So the SAFE says this qualifies for IRS Code 1202. I think that's just as effective of me telling the police officer I wasn't speeding. So it might have more teeth to it. There is actual substance. It does have equity-like rights. For example, if distributions are made, a SAFE holder gets distributions. But it doesn't have voting rights. And it's called the Simple Agreement for Future Equity. That kind of damns the whole thing.
