As soon as a DAO plans to attract investments from a venture fund, sign agreements with contractors, or list a token on an exchange, the management of the DAO will likely start to receive questions on when and how the DAO has been incorporated. This is because incorporation is part of a “legal wrapper” for a DAO and without this legal wrapper, interaction between the DAO and the outside world can become complicated. In addition to this, a DAO without a legal wrapper poses some real risks to DAO members.
So how should you approach legal structuring for your DAO? Which countries should you choose from, and where should you start? These questions will be answered in this guide as we answer the following:
- Do DAOs really need “legal wrappers”?
- What are the best entities and countries for DAO incorporation?
- How to choose the most suitable option for DAO registration
- How to prepare for DAO registration
Does a DAO need to be registered?
If your DAO is going to engage with other DAOs and companies, issue tokens to the community, issue DAO members with governance rights, and manage a Treasury, for example, then the answer is most likely “yes”.
Non-incorporated DAOs will certainly have difficulties interacting with investors, contractors, cryptocurrency exchanges, and other entities. But what is more important is that founders and members of a non-incorporated DAO are also exposed to legal risks. In particular:
- The risk of judicial liability. A non-incorporated DAO could be recognized as a General Partnership, where every member of the DAO is liable in a legal proceeding with all their assets
- The risk of tax liability. Members of the DAO might face fines or other penalties for a non-incorporated DAO not paying the income tax.
- The risk of financial (and even criminal) liability. Attracting funds from new DAO members and token buyers without relevant verification procedures and checking the source of funds could lead to criminal investigations for financial crimes.
One of the recent cases where legal action was brought against a DAO is Ooki DAO vs CFTC (Commodity Futures Trading Commission) case. CFTC found that the DAO was liable as an unincorporated association for illegal asset trading and other violations. In addition, they stated that "every voting participant in a DAO can and should be held individually liable for any illicit activity conducted by the DAO". If Ooki DAO had a legal entity in place, this entity would be liable, and would shield the DAO members. Instead, without proper legal structuring, the DAO has exposed every member to potential liability.
Which legal entities are best for a DAO?
DAOs can be incorporated as different entities: foundations, associations, non-profit or for-profit LLCs. The actual choice of entity and jurisdiction depends on the DAO type (community/protocol, service, investment), business model, token utilities, and other factors, which we’ll talk about in the next section.
One of the most popular forms of registering a DAO (especially, protocol and community DAOs) is a foundation, which has several advantages that make it attractive for DAO incorporation:
- A foundation is a self-owning entity. It has members that make contributions to fund the project’s development according to its statutory goals, but no owners. In contrast, corporations have shareholders, who own the company.
- Members of a foundation have the right to vote on governance proposals. The organization and further implementation of the decisions are handled by a DAO Council. This is a governance body elected by the DAO members, which has a fiduciary (trust-based) obligation to manage the contributions of the DAO members in their interests (Treasury).
- The foundation statute regulates the key aspects of a DAO. These include goals, which the DAO can spend its funds on; members’ acceptance; and members’ voting procedures, which form the governance aspects of the DAO.
Learn more about how a foundation functions as a DAO legal wrapper.
What countries are best for incorporating a DAO?
In 2023, the most popular countries for DAO incorporation include the Marshall Islands, the US (Wyoming), Switzerland, the Cayman Islands, Liechtenstein, Singapore, Panama, the British Virgin Islands, Gibraltar, and the Bahamas.
This list is quite long, and the different jurisdictions have varying regulations worth considering.
To decide on where to incorporate a DAO, here are the key criteria to explore:
- Do you plan to receive profit and distribute it amongst DAO members? If yes, then consider a “for-profit” DAO. For-profit DAOs are usually registered as Liechtenstein foundations, Wyoming DAO LLCs, Marshall Islands DAO LLCs or Panama foundations. Non-profit DAOs are often incorporated as Swiss foundations/associations, Cayman Islands foundations, or the Marshall Islands DAO LLCs.
- What level of decentralization do you want to have in your DAO? Some entities offer more flexibility when implementing decentralized governance structures, while others are quite strict in terms of what governance bodies and voting procedures might be possible. Among the less decentralized options are the Swiss foundation, the Liechtenstein Foundation and the Singapore foundation. More decentralized options include the Wyoming DAO LLC, the Cayman Islands foundation, and the Marshall Islands DAO LLC. Use the flowchart below to help guide you on the different options.
- Is a public token sale feasible? For example, in Singapore, the US (Wyoming), and the Bahamas, a public sale would require a VASP authorization, whereas no permit is needed in the Marshall Islands or Panama.
- Are KYC procedures and maintenance of a register of DAO members required? Switzerland, Liechtenstein, Singapore, and the Cayman Islands have high KYC (know your customer) standards. Panama, the British Virgin Islands, and the Marshall Islands have much more relaxed requirements for KYC with some not requiring any KYC checks at all.
These are the bare minimum criteria that you should take into account when considering options for DAO incorporation. The table below provides a detailed overview of country and entity options, including details on whether a local DAO manager and KYC processes are required, how affordable and fast the setup is, and whether a DAO can have a private DAO register.
How to choose the most optimal legal structure for your DAO?
Along with adhering to the above criteria, the DAO team must also have the following in place in order to give them the best chance of successfully incorporating their DAO:
- A finalized White Paper. This should describe how the DAO functions, the principles of the Treasury formation and funding, and the procedures for accepting new members, voting and decision-making (governance);
- A detailed description of the token's status. Whether it is a utility, protocol, payment, governance, dividend, or another type of token, the tokens' use and purpose needs to be described.
- A detailed Token Cap Table. In particular, the cap table has to explain how big the emission is, which pools are allocated from it (pools of tokens for founders, the team, validators, investors, Treasury, etc.). The table also must explain how the tokens are distributed: through a private/public sale, airdrops, incentives, launchpad on an exchange, SAFT, or in another way.
Without these aspects finalized it will be hard for both the DAO team and legal specialists to identify which DAO incorporation options are most suitable and what legal structuring route would be best for each unique case.
It is also important to decide where the core team of the DAO will be located, who will be appointed as a member of the DAO Council, and where potential investors may be located (if fundraising is on the cards). This information helps to determine what operational companies are required in the legal structure. It will also help in deciding whether a separate company for token emission and subsequent transfer to the Treasury for distribution is needed. You can read more about legal structures for decentralized projects.
Finally, to decide on the best jurisdiction for DAO incorporation, the team needs to compare its White Paper and Token Cap Table with the various foundations’ criteria in different countries. The option with the most matches is the optimal choice.
Get started with DAO legal structuring
If you are a team working on your own DAO and already considering its legal incorporation, speak to our team. We'll be happy to tell you more about how we help DAOs prepare all-encompassing legal structures that protect the DAO and promote its growth, and how we price legal works for your DAO project.
Nestor is a Co-founder & Head of Web3 Legal at Legal Nodes. Having over seven years of legal consulting experience, Nestor loves working with innovative startups and Web3 projects, helping them navigate the regulations and scale on global markets.