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 2nd 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 3rd 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.
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.
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