Bankruptcy Court Holds That SAFE Investors May Have Creditor Claims in Chapter 11

The SAFEs were issued in 2021 as part of Rhodium’s capital-raising efforts. By their terms, the instruments entitled holders to receive equity in Rhodium upon the occurrence of certain events, such as a new equity financing or an initial public offering. They also included a cash-out feature: If a liquidity or dissolution event occurred, SAFE holders were entitled to repayment of their purchase amounts—the “Cash-Out Amount.”

The debtors objected to the claims, arguing that SAFEs are contingent equity instruments, not debt, and therefore do not create claims under the Bankruptcy Code. SAFE investors, including Celsius Holdings US LLC, countered that the operative contractual provisions obligated Rhodium to repay their investments upon certain triggering liquidity or dissolution events. They further asserted that the amended chapter 11 plan itself would create a dissolution event because it provided for all of Rhodium’s remaining assets to be liquidated and distributed through a wind-down structure—thereby triggering the SAFE holders’ contractual right to payment of the Cash-Out Amount. This, the investors argued, created a creditor “claim” within the meaning of the Bankruptcy Code.

In a decision issued on August 30, 2025, the Bankruptcy Court sided with the investors, holding that, under the circumstances, the SAFE agreements created a “claim” to the contractual Cash-Out Amount. The court explained that this gave the investors a right to payment that was senior to equity but junior to the claims of general unsecured creditors.

The Bankruptcy Court’s Analysis
Applying Delaware law and the Bankruptcy Code’s expansive definition of “claim,” the court held that the SAFE agreements created enforceable contingent claims. The court focused closely on three operative provisions:

• Section 1(b) (Liquidity Event): This section provided that, upon a change of control other than an IPO, SAFE holders were subject to the liquidation priority in section 1(d), entitled to the greater of (i) the Cash-Out Amount (equal to their original purchase amount) or (ii) the “Conversion Amount,” calculated by dividing the purchase amount by the “Liquidity Price” tied to the implied value of the company’s common stock.
• Section 1(c) (Dissolution Event): This section provided that, if the company dissolved, SAFE holders would automatically be entitled to receive their Cash-Out Amount, again subject to section 1(d)’s priority waterfall. This provision gave investors downside protection by ensuring they could recover their original investment in the event of liquidation, at least to the extent assets were available after payment of higher-priority claims.
• Section 1(d) (Liquidation Priority): This section contained three layers of language that, at first glance, seemed in tension. It opened with a general statement that, “[i]n a Liquidity Event or Dissolution Event, this SAFE is intended to operate like standard Common Stock.” But it also specified that holders’ rights to the Cash-Out Amount were (i) junior to payment of “outstanding indebtedness and creditor claims,” but (ii) senior to common stock. Finally, it clarified that holders’ rights to the Conversion Amount were “on par with” common stock, meaning that if SAFEs converted into equity, they would share pro rata with stockholders.

The debtors seized on the general prefatory language in section 1(d)—that SAFEs were intended to operate “like common stock”—to argue that, regardless of triggering events, SAFE holders could only be treated as equity holders. The court rejected that interpretation, emphasizing a core principle of Delaware contract law: Specific provisions control over general ones. The general “like common stock” clause could not be read to nullify the more specific provisions establishing a liquidation hierarchy that placed the Cash-Out Amount above common stock recoveries. To hold otherwise would render the priority language in section 1(d) meaningless, a result Delaware law does not permit.

The court also declined to apply section 510(b) of the Bankruptcy Code, which subordinates claims “arising from rescission of a purchase or sale of a security” or “for damages arising from the purchase or sale of such a security.” The debtors argued that because SAFEs are securities that contemplate potential future equity conversion, all repayment rights fell within 510(b). The court disagreed, reasoning that 510(b) is aimed at stockholder claims seeking to rescind or recover damages tied to a securities transaction for, by way of example, fraud or misrepresentation. By contrast, SAFE holders were not seeking to unwind their investment or recover damages, but rather to enforce specific payment obligations spelled out in their contracts. Their claims thus arose not from the “purchase or sale” of the SAFEs, but from the debtors’ contractual obligation to pay once a triggering event occurred.

Finally, the court clarified SAFE holders’ relative position in the capital structure. While their claims were expressly subordinated to the claims of general unsecured creditors, they were senior to equity. SAFE holders therefore occupied a middle tier: neither true equity holders nor pari passu with general unsecured creditors, but contingent creditors whose rights to payment were enforceable upon specified events. The court further observed that confirmation of the amended chapter 11 plan—which provided for liquidation of Rhodium’s assets and distribution of proceeds—would constitute a liquidity or dissolution event, thereby triggering the SAFE holders’ cash-out rights.

Practical Implications and Conclusions
The court overruled the debtors’ omnibus objection and held that the SAFE investors were creditors with contingent claims under the Bankruptcy Code. This ruling is among the first squarely to address SAFEs in bankruptcy and has important implications for both issuers and investors.

For debtors, the decision underscores the need to anticipate how hybrid financing instruments will be characterized in bankruptcy, as these agreements can expand creditor classes and alter distribution priorities. For investors, the case validates the enforceability of cash-out provisions as contingent claims, offering downside protection more akin to creditor treatment than equity participation. Looking ahead, careful drafting of SAFEs and similar instruments will be critical, as courts will give effect to contractual language that allocates risk and repayment rights in a restructuring scenario.