DAO Structures: The Caymans Foundation Company Option

There has been much discussion across the past few years about the legal status of a DAO.

 

For those new to the concept a DAO (a decentralized autonomous organization) is a Blockchain based “organization” encoded as a transparent computer program, controlled by the organization members rather than by any outside entity or authority.

 

As discussed in a previous article the primary aim behind the creation of a DAO is to create a virtual entity to replace the central management of previous forms of organization. A decentralized autonomous organization (DAO), is an organization, particularized by rules encoded as a computer program, that is transparent, and controlled by the organization members. In terms of decision making a DAO is, in effect, unable to be influenced by any outside party including any central government.

 

Legal challenges can come into play if a DAO wants to own Intellectual Property eg a Patent (Can a DAO in fact own a patent? It’s a moot point currently being debated by final year IP law students in high level law schools!). There’s also the inherent litigation risk associated with any unincorporated Association. If a DAO were to be sued – without the protection of having been incorporated as a Limited Liability body – the individual members of the DAO would be jointly and severally liable for any judgment debt that may be entered.

 

Enter the progressive Financial Centre that is the Caymans Islands which passed amendments to its Companies Law in 2017 to give birth to a product now at the forefont of DAO Industry developments ie the “Foundation Company”.

 

Over the course of the past few years we have seen numerous DAOs congregate as Private Foundations. The jury is still out however in terms of whether a Foundation can deliver the necessary commercial flexibility that a DAO may need to take a product (or service) to market. Typically a Foundation with commercial objectives would form a subsidiary Company -  which would enter into some form of Licensing or Royalty agreement with the parent Foundation – such as would enable the Company to commercialise any IP owned or developed by the Foundation.

 

A Foundation Company potentially can cover both objectives within one legal shell.

 

Cayman Islands Foundation Companies – Overview

 

The Caymans Islands Foundation Company is a remarkably flexible vehicle that operates like an incorporated trust, allowing it to function like a civil-law foundation or common-law trust while retaining the separate legal personality and limited liability of a company.

 

The passing of this new Law was timely as it coincided with the nascent emergence of the DAO in the Blockchain space. As DAOs are launched with the ultimate goal of becoming fully decentralised and governed by the DAO’s community, a Foundation Company vehicle can assist the Founders of DAOs to achieve a range of goals.

 

The Need for Legal Personality

 

DAO Founders are often reluctant to create a legal personality for the DAO. As the purpose of a DAO is to be a decentralised organisation that is governed by a community, the idea of centralising responsibilities or ownership rights into a legal person is often seen as anathema to the core values of the project.

 

Moreover, the legal structures available in many jurisdictions require some person or group to act as the owner of the DAO. However, DAOs without legal personality run into problems. These include the inability of the DAO to:

(a) interact with third parties outside the DAO

(b) enter into contracts (particularly with digital asset exchanges)

(c) hold assets

(d) protect valuable intellectual property that may be imitated by other projects or DAOs, and

(e) carry out the wishes of the DAO where the community has voted for the DAO to undertake an action vis a vis third parties.

 

As a result, DAO Founders can sometimes find themselves carrying out actions on behalf of the DAO and, consequently, be personally exposed to potential liability.

 

Foundation Company as a Solution

 

The solution to the problems above is for the DAO to establish a Foundation Company. Like a typical company, the Foundation Company has legal personality to enter into contracts and undertake actions with third parties. It is also managed by directors who carry on the business of the DAO. However, unlike a company, a Foundation Company can be structured without shareholders. In essence, it can be ownerless – just like the DAO it represents.

 

In place of shareholders, a Foundation Company can be supervised by a supervisor (or even multiple supervisors if desired). A supervisor has no ownership or economic entitlement in the Foundation Company but simply acts as a steward, ensuring that the directors of the Foundation Company observe their obligations to the DAO pursuant to the Foundation Company’s governing documents. Therefore, with no shareholders, all of the officers of a Foundation Company simply have the objectives of the DAO as their priority – similar to trustees and enforcers carrying out the objectives of a trust.

 

Flexibility

 

As a further benefit, the Caymans Law provides the utmost flexibility to a Foundation Company when drafting the governing documents of a DAO. These governing documents comprise of the memorandum and articles of association (the M&A). With some limitations and restrictions, the M&A of a Foundation Company could include almost any form of governance structure so long as the Foundation Company is managed by at least one director, is supervised by at least one supervisor and has a secretary.

 

The director(s) and the supervisor(s) need not be natural persons (e.g. they could be corporate vehicles) and could even be the same person. The M&A could even mirror the governance structure of the DAO itself, with each user or node of the DAO entitled to one vote on any number and type of matters included as such in the M&A.

 

At the very least, the M&A could include provisions that require the director(s) and the supervisor(s) of a DAO to carry out the decisions of the DAO or could provide that the director(s) and/or the supervisor(s) be nominated by majority resolution passed by the DAO. The possibilities are truly endless and the foundation company’s flexibility is a great advantage to any existing or future DAO.

 

Works like a Trust

 

DAOs often wish to hold assets for the benefit of the DAO community or issue tokens or distribute rewards to users. Once again, the Foundation Company is a great fit as it acts like a legal trust and has the power to designate beneficiaries. However, one particular benefit of the Law’s concept of a beneficiary is that it will not be treated as a beneficiary under a legal or common law trust arrangement.  This is because the starting position under the Law is that a designated beneficiary has no rights or powers as against the foundation company.

 

The Law therefore excludes the creation of any inadvertent common law trust rights and limits the beneficiary’s rights to those expressly stated by the Foundation Company. This is particularly useful for DAOs which are then free to designate the users or the nodes of a DAO as beneficiaries but with limited rights.

 

Another attractive feature is that a Caymans Foundation Company does not have to maintain a register of its beneficiaries. This means that a Caymans Foundation Company need not specify individuals as beneficiaries but can designate beneficiaries by class of persons (e.g. “tokenholders” or “node operators”) and also reward those beneficiaries according to that class.  Whilst anti-money laundering considerations are always a factor, this could be particularly useful for DAOs built on blockchain technology where the DAO intends to undertake distributions, airdrops of tokens or other rewards to the DAO community.

 

Tax and Economic Substance

 

As a DAO is decentralised and in theory has no fixed location, many DAO Founders are reluctant to incorporate their DAO in any particular jurisdiction as this may lead to unintended and unwanted tax consequences. However, as a tax neutral jurisdiction, a Caymans domiciled Foundation Company need not worry about taxes being levied against it in the Cayman Islands.

 

Interestingly, a Foundation Company limited by guarantee is specifically exempted from the economic substance regime of the Cayman Islands. Hence a DAO incorporated as a Caymans Foundation Company does not have to move staff, nodes or resources to the Cayman Islands to prove that it has substance here. This means that the DAO can be a truly internationally focused project. It also means that it can hold the intellectual property of the DAO and even make profit from the intellectual property (or any other relevant activity under the substance regime) without creating substance in any particular jurisdiction.

 

Would you like to know more? Then please Contact Us:

 

www.offshoreincorporate.com

 

info@offshorecompaniesinternational.com

 

ocil@protonmail.com

 

oci@tutanota.com

 

oci@safe-mail.net

 

ociceo@hushmail.com

 

DISCLAIMER: Information current at 31.10.22. OCI is a Company/Trust/LLC/LP/Foundation Formation Agency. We are not tax advisers or legal advisers. You are advised to seek local legal/tax/financial advice in regards to your local reporting/tax requirements before committing to set up or use an Offshore Company or other entity.

 

How to make an Investment in the name of your IBC

We are often asked by clients How do I buy or make or place an investment using my Offshore Company?

 

(This article assumes that you’ve already set up an Offshore Company and that you’ve deployed a Nominee Director as part of your Corporate/legal structure).

 

The starting point here is that you would or should have been appointed, via a consultancy agreement/contract, as an authorised representative/agent of the Company.

 

Such an appointment, in effect, gives you (or should give you) the authority and the power to go shopping for investments on behalf of your IBC/Offshore Company.

 

Typically you would also have the power to negotiate the price of the investment and the terms of the purchase.

 

Once (ie acting as Agent for the company) you’ve reached agreement with the seller/investment provider as regards the price and terms of the investment:

 

  • You would make certain recommendations in writing to the Company Director ie to place XYZ investment. In short you’d need to explain what the particular investment/opportunity is that you’ve found and why you think/believe the particular investment/opportunity you’ve found is or would be a good investment for the company. Ideally, at the same time you would email the documents that need to be signed by the Company in order to proceed with the investment to your International Corporate Services Provider/the Company Director; and
  • Your Company would then call a Board meeting authorizing the Company to proceed with the transaction
  • The Company director would then sign the board resolution and the purchase documents.

 

NOTE: If you need to close the sale quickly the Board could provide you or your local Lawyer with a Limited/Specific Power of Attorney enabling you/your Lawyer to sign the Purchase/Sale Contract

 

Would you like to know more? Then please Contact Us:

 

www.offshoreincorporate.com

 

info@offshorecompaniesinternational.com

 

ocil@protonmail.com

 

oci@tutanota.com

 

oci@safe-mail.net

 

ociceo@hushmail.com

 

DISCLAIMER: OCI is a Company/Trust/LLC/LP/Foundation Formation Agency. We are not tax advisers or legal advisers. You are advised to seek local legal/tax/financial advice in regards to your local reporting/tax requirements before committing to set up or use an Offshore Company or other entity.

 

 

 

Costa Rican EGaming Licenses

Are you looking to set up an Online Gaming Business or a Payment Processing Business? If so you might want to consider applying for a Data Processing License in Costa Rica (“CR”).

 

Costa Rica Background

 

Costa Rica is a small (population 5 million) Central American country (bordered by Panama, Nicaragua, the Pacific Ocean and the Caribbean Sea) and is arguably the most politically and economically stable country in the region.

Historically the Costa Rican economy centred around agriculture but, since the dawn of the new millennium, CR has diversified its economic focus, in the process creating a boom in tourism, finance, and corporate services. Costa Rican residents now enjoy a high standard of living, social stability and some of the foremost education in Central America. Spanish is the first language but English is commonly spoken particularly in business circles.

 

In summary what you/we will need to do here is incorporate a Costa Rican Company (ie an S.R.L.) AND then apply for a Data Processing License (“DPL”).

 

For many years Costa Rican Corporations have been known and used in the offshore world as vehicles for online gaming. Hence included in the Articles of Incorporation of such companies appears typically the activity of ”online gaming and entertainment”. Some clients can function just with the CR company, however most clients come to us and request the DPL as Banks, Merchant Account Providers and Ewallet providers require to sight such a licence before they will agree to provide accounts or payment processing or merchant account services for CR Companies.

 

Step 1 Company Formation

 

First step is you will need to Incorporate a Costa Rica (“CR”) Company for Gaming:

 

Type of entity: S.R.L. (Sociedad de Responsabilidad Limitada)

 

Main characteristics: authorized for gaming in its bylaws, limited liability, offshore tax exempt, low maintenance, operated by a single director

 

Includes:

 

ü  Articles of Incorporation

ü  Share Certificates

ü  Legal Books

ü  Corporate Certification

ü  Resident Agent*

ü  Registered Address*

ü  Official Translation to English

ü  Tax Registration

*Included in the first year*

 

Legal Fees: USD 2,300 (includes registry fees, VAT and Yearly Corporations Tax)

 

Estimated Duration: 2-4 days (we offer the fastest incorporation service available compared to the normal 2-4 weeks of other companies) 

 

After one year of operation, you will need to renew it by paying:

 

ü  Legal Fees, Renewal of Resident Agent, Registered Address, Legal Book Custody, Yearly Corporations Tax Payment Diligence and Final Beneficiary Declaration: USD 950.00

ü  Associated Expenses, Yearly Corporations Tax USD 150.00 paid with the incorporation and then every January.

 

Annual Renewal:

 

Re Gaming Businesses as advised there is no online gambling license in Costa Rica and that a company incorporated under the laws of Costa Rica can operate an online gaming business under a “data processing” license. The basic requirements to obtain such a license are:

  • Office Lease Contract
  • Health permit
  • Workers insurance policy

 

A specific gaming license was issued as a tax in 2012, such license starts at US$40K per year and increases to US$60K and US$80K depending on the number of employees, This particular license was created for gaming companies that actually have employees in Costa Rica; thus far nobody has paid for such a license as it doesn’t provide any real benefit. Hence startups keep operating with just the CR Corporations and with the Data Processing License (DPL – see details below) which is especially valuable if you wish to be accepted by ewallet providers such as Skrill etc.

 

The following is the description that we give to our clients on a daily basis:

 

Step 2: Apply for a Data Processing License

 

Type of license: CR Business License

 

Process Includes:

 

ü  Lease of Small Office Space at a selected local government

ü  Zoning Permit at local government

ü  Employer Registration at Social Security Agency

ü  Work Risk Insurance at Insurance Agency

ü  Health Permit at Ministry of Health

ü  Business License at local government

 

Legal Fees: USD 9,750 (50% to begin, 50% with approval)

Estimated Duration: 3 months

 

After one year of operation, you will need to renew it by paying:

 

ü  Yearly Renewal: USD 4,750 (after one year of operation includes one year lease and business license yearly taxes and processing fees)

 

Ancillary Services

 

We can also assist with drafting and/or reviewing the website and service terms and conditions. For these kind of jobs we charge an hourly rate ($US300 per hour). Average cost is usually between $1,500 and $US2,000. And we can advise on what countries residents it would be illegal to market such a business to (again on an hourly rate basis)

 

Would you like to know more? Then please Contact Us:

 

www.offshoreincorporate.com

 

info@offshorecompaniesinternational.com

 

ocil@protonmail.com

 

oci@tutanota.com

 

oci@safe-mail.net

 

ociceo@hushmail.com

 

DISCLAIMER: OCI is a Company/Trust/LLC/LP/Foundation Formation Agency. We are not tax advisers or legal advisers. You are advised to seek local legal/tax/financial advice in regards to your local reporting/tax requirements before committing to set up or use an Offshore Company or other entity.