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.
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:
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.