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 potentially be recognized by Regulators or the Courts as an unregistered General Partnership.
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 can attach 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 the liability of at least one member of the DAO, liability can extend to DAO assets AND 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.
There are several legal structures one could potentially deploy as a DAO Legal Wrapper. This Article looks at how a Private Foundation might be so deployed.
Foundations – Background
A Foundation is a legal entity in its own right ie it can sued and be sued. To protect 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 case of regulatory investigation, it will act as a “legal representative” for the community of the DAO members and protect them from the risks of unlimited liability.
A Foundation is a 3 headed creature and (like a Company) is a separate legal entity. Unlike a Company however it doesn’t have the typical top-heavy Director focussed hierarchal management structure.
A 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 lie with a/the Councillor/s in the first instance, the beauty of a Private Foundation is that Councillors rights can be reserved to the Founders (and a Founder can assign rights as reserved to him/her to any third party). Hence the Founders of a Foundation can appoint an independent management board but yet control the board by retaining/exercising reserved voting rights.
Functions of a DAO Foundation
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 typically 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 documents a set of rules governing the Foundation’s operations; and
- It acts as a Compliance manager for the DAO Treasury to implement AML etc measures and to supervise their realization in the process of disposing of the DAO Treasury.
Operational Flexibility
Where a Foundation is deployed as a DAO Legal wrapper each member of the DAO can act/be appointed as a Founder and/or as a Councillor of the Foundation (and be nominated as a beneficiary, see below) – delivering voting rights – with voting carried out online via execution of smart contracts.
Management & Control of a Foundation in the first instance lies in the hands of the Foundation Council (& a Foundation which is seen to be managed/controlled onshore can be taxed onshore). A Foundation can have multiple Councillors or just one councillor. In cases where a/the DAO Foundation is looking to turn a profit – and members wish to preserve tax planning possibilities – a “Nominee” Foundation Councillor (ie resident in a nil tax jurisdiction) could be deployed and the DAO members appointed via contract as the Foundation councillor’s investment advisers. Members would vote on any proposed activity and the result of that vote would be tendered to the Councillor/s – who could be required by the Foundation’s Constitution/Charter to only make financial decisions based on such advices.
More particularly, if the DAO structure is reasonably straight forward (and, again, if the DAO is looking to generate a profit) then you should be able to use a Foundation wherein the governance token holders are nominated as a class of beneficiaries. In this case 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.
In our experience historically Caymans Foundation Companies have commonly been deployed as DAO Legal wrappers. However, with the advent of restrictive VASP rules in the Caymans lately we are seeing Panama and Seychelles Foundations being commonly deployed to act as DAO Legal wrappers.
For detailed information in regards to Seychelles and Panama Foundations check these Links:
https://offshoreincorporate.com/seychelles-foundations/
https://offshoreincorporate.com/panama-tax-free-foundations/
Would you like to know more? Then please Contact Us:
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 Foundation or other entity.
