How to Choose a Crypto-Friendly Country For DAO Legal Structuring
Blockchain projects’ teams sometimes decide not to register a DAO, thinking that blockchain doesn’t need a legal form. It is often justified that the trust in a DAO is based on the laws of math and an underlying blockchain consensus protocol. Any additional guarantees based on legal instruments are considered redundant.
At the same time, as soon as 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 starts receiving questions on when and how it has been incorporated. This is because not having a “legal wrapper” largely complicates the interaction of the DAO with the outside world.
In this article Legal Nodes explains why a DAO needs a “legal wrapper”, how a DAO can be registered, and how to choose the most suitable option for its registration. This article is not legal advice or a consultation. Information in this article can change with time due to rapidly-developing blockchain regulations.
Why does a DAO need a registration?
Next to difficulties in interactions with investors, contractors, cryptocurrency exchanges, and other entities, founders and members of a non-incorporated DAO are also exposed to some 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.
In which form can a DAO be incorporated?
The most popular form to register a DAO 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, some companies 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 Guardian or a Supervisor. This is a person elected by the DAO members, who has a fiduciary (trust-based) obligation to manage the contributions of the DAO members in their interests (Treasury);
- goals, on which a DAO can spend its funds, members’ acceptance procedure, and voting procedure (DAO governance) are regulated by the foundation’s statute.
What jurisdictions are best fit for incorporating a DAO?
To decide on where to incorporate a DAO, there are a few criteria to consider:
- whether receiving profit and distributing it amongst the DAO members is possible. For-profit DAOs are usually registered in Liechtenstein, the Bahamas, or Panama. A non-profit DAOs are often incorporated in Switzerland, the Cayman Islands, or the Marshall Islands;
- whether a public token sale is feasible. For example, in Singapore, the Cayman Islands and the Bahamas, a public sale would require a VASP authorization. At the same time, no permit is needed on the Marshall Islands or Panama;
- whether KYC procedures and maintaining a register of DAO members are required. Switzerland, Liechtenstein, Singapore and Cayman Islands have a high standard for KYC. On the other hand, Panama, the British Virgin Islands, or the Marshall Islands have much more tolerable requirements for KYC or do not require it altogether.
How to choose the most optimal legal structure for your DAO?
To find the best-fit option for DAO incorporation, its team needs to have:
- a finalized White Paper. It should describe how the DAO’s functions, principles of the Treasury formation and funding, procedures for accepting new members, voting and decision-making (governance);
- a detailed description of token’s status: whether it is a utility, protocol, payment, governance, dividend, or another type of token;
- a detailed Token Cap Table. In particular, it 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 Token Cap Table also explains how the tokens are distributed: through a private/public sale, airdrops, incentives, launchpad on an exchange, SAFT, or in another way.
It is also important to decide in which country a core team of the DAO will be located, who will be appointed as a Guardian/Supervisor of the DAO, and the expected jurisdiction of potential investors (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.
Finally, to decide on the jurisdiction for DAO incorporation, the team needs to compare its White Paper and Token Cap Table with the foundations’ criteria in different countries. The option with the most matches is the optimal choice.
How to get a consultation on DAO legal structuring
If you are a team working on your own DAO and already considering its legal incorporation, you can book a consultation with Legal Nodes. On the call, a Legal Nodes expert will:
- guide you through the pros and cons of every DAO structuring option;
- share details on the cost and time-frame for every jurisdiction;
- depending on the chosen jurisdiction, present a roadmap for incorporation. The roadmap will also include information about providers, who will be in charge of its implementation.
THE COST OF THIS 1-HOUR CONSULTATION IS 200 USD.
You can schedule a call using this link.
Legal Nodes is going to donate 50% of each consultation fee to the Ukrainian army fiercely defending Ukraine’s sovereignty.