August | 2023 | Offshore Companies International

St Vincent & The Grenadines VASP Act SUMMARY

The Virtual Assets Business Act of Saint Vincent and the Grenadines (“SVG”) was recently published by the Financial Services Authority.

The act regulates Virtual Assets Businesses incorporated in St. Vincent.

According to this law, the following categories of business are now subject to regulation in St Vincent & the Grenadines:

Exchange between virtual assets and fiat currency;
Exchange between one or more forms of virtual assets;
Transfer of virtual assets whether or not for value;
Safekeeping and administration of virtual assets or instruments enabling control over virtual assets; or
Participating in or provision of financial services related to an issue or sale of virtual assets.

The abovementioned businesses, if incorporated in SVG, must now be registered with the Financial Services Authority as Virtual Assets Business and included in the special register maintained by the FSA. The Act is now published on the website of the FSA.

Additionally, the Act imposes some obligations for such businesses including appointment of an eligible Auditor and submission of Audited Accounts on a yearly basis.

The Virtual Assets Business Act was passed on 10th of May 2022 in order to keep with the global trend for regulation and to create a regulatory framework according to the St. Vincent Times.

Requirements Summary

The main requirements as regards an applicant for a VASP License in SVG are:

Must pay a security bond of $US100,000 to the SVG FSA
Must pay an annual license fee of $12,000
Must have a local Authorised Representative
Must submit quarterly reports to the FSA including details of number of customer accounts and their USD value
Must submit annual audited financial statements to the FSA
Annual economic substance reporting
Must do customer due diligence, transaction monitoring and PEP screening and
Must report suspicious activities

OCI can assist you to apply for a VASP License in SVG. Would you like to know more? Then please Contact Us:

www.offshoreincorporate.com

info@offshorecompaniesinternational.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.

The Role of Regulations in a Foundation DAO

A Private Foundation is essentially a Corporatised trust. Like a Trust a Foundation is a 3 headed creature ie its set up by one party (called a Founder) and is managed by a 2^nd party (ie a Councillor or board of councillors). Private Foundations typically have beneficiaries nominated ie persons who are designed to benefit financially from the set up of the Foundation.

Unlike a Trust a Foundation has legal/corporate personality (ie it can sue and be sued in its own rights), and has limited liability (ie the Founders/Councillors/Beneficiaries can not be held responsible for any debts or legal liabilities incurred by the Foundation). Moreover is considered at Common law to be both the legal owner AND beneficial owner of any assets it holds. This places such assets beyond the reach of any creditors of the Foundation Founders, Councillors or Beneficiaries.

By its very nature, a Private Foundation has no owners and is thus highly compatible with decentralized autonomous organizations (DAOs) and DeFi projects which prioritize decentralization.

Furthermore, the establishment of a DAO as a separate legal entity grants it reliable corporate standing, leaving it ready to execute contracts on behalf of the DAO as well as open accounts at banks or exchanges. Finally, advanced control mechanisms can be implemented by allocating them to persons external to the Foundation’s Councillors (the Foundation’s version of Directors) — allowing founding members an influence in determining the direction taken by their organization.

DAO Foundations – Key Roles

A Foundation is established by the (public) filing of a “Charter” (sometimes called a Constitution) ie a document which records the name of the Foundation, the name of the Foundation’s Founder and the general objects/purposes for which the Foundation in question is being established.

When a Private Foundation is deployed as a Legal Wrapper for a DAO there are typically a number of players involved including:

DAO Founders: These individuals launch the DAO by deploying smart contracts and overseeing the initial issuance of tokens. These are the persons who are said to have Founded (ie given birth to) the Foundation. A Foundation need only have one Founder and the Founder/s name/s appear/s in the Charter which is a publicly accessible document. The Founders typically have the right to appoint Foundation Councillors.

DAO Councillors: Elected by the Founders, the primary role of a Foundation Council is to oversee the day to day management of a Foundation (they are the Foundation’s equivalent of Directors in the case of a Company). The Councillors should make decisions in the best interests of the DAO members. The Foundations need to appoint and have at least 1 Councillor at all times. (Panama Foundations require minimum 3 Councillors)

DAO Managers: The Foundation may or may not have a supervisory board. Managers (also known as Supervisors) oversee – and their powers, rights, and obligations are set out in the Regulations. The DAO Managers, acting as Protectors, ensures that the DAO Councillors adhere to the will of the DAO members during the decision-making process.

DAO Members: They are tokenholders who deposit their virtual assets into the foundation’s treasury, participating in the DAO’s development and decision-making processes. Initial members may also be enlisted as co-Founders of the Foundation. The ability of a Foundation to appoint DAO members and the rights of such Members will typically be set out in the Foundation’s regulations. The Foundation’s regulations can also provide for each Member to be given a seat on the Foundation Council and or the regs can compel the Council to only in accordance with the votes of the members. The voting rights of each member can also potentially be determined in the Regulations by reference to the proportion of assets contributed. Additionally at settlement the rights and responsibilities of the Foundation’s Councillor/s can be reserved to the Founder/s. The Founder/s can then assign any such reserved rights received to any 3^rd party/s (eg Members)

DAO Beneficiaries: These are the persons or class of persons who are entitled to receive an economic benefit from the Foundation. The rights or obligations are set in the Foundation’s regulations (See below). A Foundation may or may not have beneficiaries at any point in time (for example a Foundation can be set up as a “Purpose Foundation” ie to fulfil a specific purpose or purposes).

Note the name of a Foundation Founder/s is recorded in the Charter ie a document which is publicly accessible. If you want to act as a Founder or have the rights of a Founder but don’t want your name to appear in the Charter as “Founder” on record then most Foundation registered agents (for a fee) can supply a Nominee Founder for such purposes;

Foundation Regulations – Overview

Historically any information not required by law to be included in a Foundation’s Charter and which a Founder would rather keep private is written into the Foundation’s Regulations, (sometimes referred to as By Laws) ie a private document that does not need to be filed at the registry whereat the Foundation was/is registered. Typically the only people who will ever see the Foundation’s Regulations are the Founder, the Foundation Council and the Foundation’s legal advisers.

Traditionally, any information containing beneficiary names and their rights over the foundation property is written into the Foundation’s Regulations. This also ensures that the beneficiaries’ identities and succession dispositions are not revealed to third parties.

The law places practically no limits upon the structuring of the beneficial interests of a foundation. One of the more common scenarios is for a Founder to designate himself/herself as a beneficiary for life and appoint successive beneficiaries upon his death. Commonly the Founder’s wishes regarding the use, transference, and final destination of the Foundation assets are also recorded in the Regulations so that such wishes can be easily understood and then carried out privately (post the Founder’s death) by the Foundation Council.

The Panama Foundations law further enhances the confidentiality of this instrument by creating in the Foundations Law article 35 severe sanctions (fines of up to US$50,000 and imprisonment of up to six months) for breach of the duty to maintain the information confidential. This obligation applies to members of the Foundation Council and of the supervisory bodies and public or private employees having any knowledge of the activities, transactions, or operations of the foundation.

Furthermore, Regulations may be kept outside the country of registration, in the hands of the Founder, his fiduciary agent, the Protector, or any other person or institution vested with the confidence of the Founder.

DAO Foundation Regulations

One of the primary goals of a DAO is to establish decentralized governance. This entails granting decision-making power to various stakeholders, including founders, investors, validators, and tokenholders. To achieve effective governance, DAOs must implement clear procedures for voting, vote counting, decision implementation by DAO managers, and the involvement of the DAO guardian. These procedures are usually enshrined in the bylaws/regulations of the Foundation, ensuring legal enforceability for all DAO members.

As for the use of a Foundation for crypto, the private Regulations document could be used to set out a governance model for a DAO, (which could also be the shareholder of a Company that engages in for-profit crypto-related activities). It could hold DAO assets and could be compliant with a bank’s KYC requirements.

Moreover the Foundation’s bylaws can be set forth in the Regulations setting out bespoke rules with respect to who the players are in the DAO in question and how the Foundation will seek to achieve its objectives. The bylaws can establish limitations on the roles and duties of the Foundation’s Councillors and managers; and the Foundation can in the regulations nominate beneficiaries (for example, a DAO’s token holders), who will have only those rights and powers that are specified in the bylaws.

Additionally arrangements between the Foundation and the DAO associated with it generally provide that the Foundation will execute the DAO’s protocols.

Decentralized Governance

DAO members typically receive voting rights within the DAO. The specific procedures for granting voting rights may vary among DAOs. Some DAOs require token holders to stake their tokens in decentralized finance (DeFi) platforms, while others issue separate governance tokens or limit membership to protocol validators.

One of the primary goals of a DAO is to establish decentralized governance. This entails granting decision-making power to various stakeholders, including founders, investors, validators, and tokenholders. To achieve effective governance, DAOs must implement clear procedures for voting, vote counting, decision implementation by DAO Councillors, and the involvement of the DAO Managers/Supervisors. These procedures are usually enshrined in the bylaws/regulation of the foundation, ensuring legal enforceability for all DAO members.

To summarize a set of Regulations is an extremely useful tool for any DAO Foundation in that it can decide, in advance:

Who the key players are going to be in your DAO Foundation
What role each player is to have
What commercial or philanthropic activities the DAO is being established to pursue
How voting rights are determined
How your DAO Foundation will make decisions
Who (if anyone) can/will benefit financially from the Foundation’s investments/activities

The above is a general guide in respect of what you need to be thinking about prior to passing Foundation regulations. If you are looking to set up a DAO Foundation it is recommended that you engage a specialist Web3 Lawyer to assist with drafting of the Foundation’s regulations.

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

www.offshoreincorporate.com

info@offshorecompaniesinternational.com

Panama Foundation DAOs

Since their advent the Courts and legislators have considered DAOs (Decentralized Autonomous Organizations) to be unincorporated partnerships. In a partnership, each partner has joint and several liability ie unlimited liability. Therefore, if a DAO is sued or becomes insolvent (ie unable to pay its debts as and when due), each member is exposed to liability for the entire amount of funds owed at law by the DAO.

To address this weakness, ideally your proposed DAO would be “wrapped” inside a legal entity (such as a Limited Liability Company or a Private Foundation) to ensure limited liability.

Over the course of the past few years, for a variety of reasons, Private Foundations have become increasingly deployed to act as Foundation Legal Wrappers.

The object of this Article is to provide a brief synopsis of the Panama Foundation as a potential Legal Wrapper for your DAO.

Private Foundations Overview

A Foundation is a 3 headed creature and (like a Company) is a separate legal entity with Limited Liability. Unlike a Company however a Foundation doesn’t have the typical top-heavy Director focussed hierarchal management structure.

A Panama Foundation:

Is set up by a Founder/s
Is managed day to by a Councillor or a board of Councillors
Is either set up to fulfil a specific purpose or it has nominated beneficiaries ie persons or a class/es of persons who are designed to benefit financially from the set-up/actions of the Foundation

Whilst the day to day decision making responsibilities of a Foundation lies with the Councillor/s the Councillors’ rights can be reserved to the Founders (and the Founders can assign those rights as reserved to them to any third party)

As you may know a DAO legal wrapper typically holds the DAO treasury, protects DAO members from unlimited liability, and permits DAO members to vote. A DAO that has been ‘legally wrapped’ is often more attractive to investors as a DAO with a strong legal framework is less likely to face difficulties with issues of liability, non-compliance with regulation, and ineffective treasury management.

All in all, in a DAO structure, a Foundation performs three main functions:

It acts as a liability wrapper to protect the DAO members from unlimited liability for the DAO’s activities;
It works as a governance overseer – every Foundation must create a Constitution (commonly known as a Charter) which typically lays out a set of rules governing the Foundation’s operations; (additional rules about how the Foundation carries out its objects etc can be set out in its “Regulations” which is a private document that doesn’t need to be filed with the Registry)
It acts as a Compliance manager for the DAO Treasury to implement AML measures and to supervise their realization in the process of disposing of the DAO Treasury.

Limiting Liability

In the Web3 industry, some DAO Founders probably (wrongly) assume that if the DAO Treasury is on-chain and its management is carried out by on-chain voting, the DAO won’t require any legal structure. However, in an unregistered DAO, the community of members can sometimes be recognized by regulators or judicial bodies as an unregistered general partnership which as alluded to can have (potentially severe) legal consequences.

At law the Partners in a Partnership are jointly and severally liable for the debts/liabilities of the Partnership. If a DAO is established/operates as an unregistered general partnership then each member is exposed – ie unlimited legal liability attaches to each member. Consequently, if regulators, tax authorities, or business partners/suppliers have concerns about the legality of certain activities undertaken by the DAO, and can establish liability of at least one member of the DAO, liability can extend to all the Members property/assets ie all the DAO members may be recognized as responsible for the actions (or inactions) of the DAO as a whole.

A Foundation is a legal entity in its own right ie it can sued and be sued. To protect a proposed DAO members from unlimited liability, savvy Web3 founders often look to the registration of a Foundation as a “legal shield” for DAO members. In cases of regulatory investigations, it will act as a “legal representative” for the community of the DAO members and protect them from the risks of unlimited liability.

Moreover, each member of the DAO can act as a Founder or Councillor of the Foundation (as well as a beneficiary) – delivering voting rights – with voting carried out online via execution of smart contracts.

More particularly, if the DAO structure is reasonably straight forward (and if the DAO is looking to generate a profit) then you should be able to use a Panama Foundation with the governance token holders nominated as a class of beneficiaries.

The members would have to agree to abide by the DAO constitution and operating rules which will in effect “marry” the corporate structure with the DAO operations.

Foundations Tokens & VASP Laws

Commonly the purpose of a DAO might be to raise Capital via the issuance of Crypto Tokens (ie a Virtual Asset).

Most jurisdictions have either passed or are on the road to passing VASP (Virtual Asset Provider) Legislation. If you are set up (or hoping to set up) as a Company or as a Foundation in one of these jurisdictions you will need to apply for a VASP License, which typically is an involved (circa 3 months) and costly (20-30k+) process.

Interestingly in Panama the Legislators tried to pass a VASP law but the law was struck down last month as unconstitutional by the country’s Supreme Court. What this means is you can incorporate/register a Blockchain based enterprise in Panama (including a Foundation DAO) without needing to apply for a VASP License!

OCI can assist you to set up a Panama DAO Foundation from as little as $2,900.

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

www.offshoreincorporate.com

info@offshorecompaniesinternational.com