Swiss Foundation as a DAO Legal Wrapper: What You Need to Know

August 4, 2022
TABLE OF CONTENTS

Swiss Foundation as a DAO Legal Wrapper: What You Need to Know

August 4, 2022

You might already be familiar with a Cayman Foundation or Wyoming LLC as options for DAO Legal Wrappers. Switzerland also offers the possibility of becoming the “home” for your DAO, with a Swiss Foundation. This option will suit those who prefer a jurisdiction with a strong reputation for effective regulation as well as possibly the world’s best banking and corporate services and a fairly flexible legal framework (in comparison to other jurisdictions with a civil legal system). The downside? Choosing this route could definitely burn a hole in some pockets. A Swiss Foundation is one of the most expensive options for incorporation and maintenance of your DAO’s legal wrapper.    

Let’s deep dive into this jurisdiction and discover who may benefit from a DAO Swiss Foundation the most.

Why might Switzerland work for your DAO? 

Switzerland has no special regulations for DAO but instead has a very good practice of application of existing provisions from general regulation to DAOs. In other words, existing legal frameworks, especially the Swiss Code of Obligations and the Swiss Civil Code offer a nice environment to set up a DAO, despite neither of those regulations being written or designed specifically for DAOs. Switzerland as a jurisdiction for a DAO legal wrapper offers the following benefits: 

  • a flexible legal system of Swiss legislation (especially in comparison with other jurisdictions with a civil legal system); 
  • the biggest range of opportunities for cooperation with financial institutions, including cooperation with banks (there are more than 240 banks in Switzerland, holding more than $3.5 trillion (3.4 trillion Swiss francs) of assets); 
  • a highly reputable jurisdiction: Switzerland is popular among the biggest crypto players on the market (Ethereum, NEAR and Cardano have foundations there), and is attractive for investors too; and
  • the limitation of personal liability, made possible as a Swiss foundation has its individual legal personality.

However, there are a few aspects of establishing a Swiss foundation that may throw in some complications and deter the set up of a DAO Legal Wrapper in Switzerland: 

  • the process is generally quite expensive, with a lot of bureaucracy to deal with. As an example, you will need a local director in the board and must transfer an initial capital amount of around $52,000 (50,000 Swiss francs) prior to registration; and
  • once established, the constitutional documents of the Swiss foundation cannot be amended easily taking into account the fact that you must pass through many bureaucracy procedures for this purpose, including document translation, which might be required in certain cantons (regions) of Switzerland, application to the authority responsible for registration of legal entities, and payment of certain fees.

📚 Read more: How to choose a crypto-friendy country for DAO legal structuring.

How does a Swiss Foundation work?

Under the applicable legislation, a foundation is established by the endowment of assets for a particular purpose, therefore, you should clearly define the purpose of your foundation prior to its registration. In the future, your foundation and any activities undertaken with respect to the pre-defined purpose, will be supervised by the relevant regulatory authorities. For example, if the purpose of your foundation is development and enhancement of the project (e.g. protocol), you must not mix this activity with other activities, such as investment in the projects, development of the other project, or some other charity-related activity.

The foundation is entered in the commercial register based on its charter. The foundation’s charter must regulate the governing bodies and the manner in which the foundation is to be administered. Consequently, here there is a good degree of flexibility that will help to prescribe the DAO governance model. 

As a general rule, an external auditor must be appointed by the foundation. The scope of the audit (either full, or limited) depends on the size of the foundation’s assets. Size criteria include:

  • a total balance sheet of $20 million (20 million Swiss francs);
  • a total revenue of $41.5 million (40 million Swiss francs); or
  • a yearly average of 250 individuals in full-time employment

In instances where at least two of the above described size criteria are satisfied by the foundation in two consecutive years, the foundation’s assets shall be deemed as large and subjected to a full audit.

If the foundation is not found to be large on the basis of the size criteria, they will be subject to limited audit requirements. It should be stressed that the foundation may be exempted by the regulator from audit obligations if its balance sheet total in the past two years was less than $208,000 (200,000 Swiss francs).

Generally speaking, the matter of the audit is quite painful for founders of young projects, because the price in Switzerland of the audit could vary from ten to dozens of thousands of dollars depending on the project’s unique characteristics, which, in turn, is quite a big amount for a developing project.

The supervisory authority in Switzerland has quite broad powers over foundation regulation, including the power to: 

  • issue directions to the foundation with respect to entering into the commercial register;
  • exempt the foundation from the audit requirements; 
  • obtain reports from the foundation’s auditor and analyze them; 
  • take necessary steps in cases where the planned system of organization proves inadequate or if the foundation lacks one of the prescribed governing bodies or one of the governing bodies is not lawfully constituted;
  • transfer the assets from one foundation to another foundation (as similar as possible) in the event that the foundation whose assets are subject to transfer is found to be unable to;
  • take action in cases where the auditors establish that the foundation is over indebted or will no longer be able to meet its obligations in the longer term. The foundation must submit the balance sheet to the supervisory authority, which shall direct the board of trustees to take the necessary measures and, if the board fails to do so, the supervisory authority has the power to take the necessary measures itself; 
  • make requests concerning the modification of the foundation’s organization where such a step is urgently required in order to preserve the foundation’s assets or safeguard the pursuit of its objects, and on the amendment of the foundation’s objects (purpose), where the original objects have altered in significance or effect to such an extent that the foundation has plainly become estranged from the founder’s intentions;
  • make minor amendments to the foundation charter provided these are objectively justified and do not impair the rights of any third party; and 
  • dissolve the foundation in certain cases (for example, in cases where its objectives have become unlawful or immoral).

How does decentralized governance work in a Swiss Foundation?

From a practical point of view, the applicable legislation empowers the prescription of rules with respect to governing bodies of the foundation and the manner in which it is to be administered in charter. Therefore, legislation permits the existence of a standard structure of a DAO whereby members may vote in compliance with the rules, prescribed by the smart contract and constitutional documents of the foundation (charter). After voting, the highest governing body of the foundation, most commonly the foundation board, can implement the relevant decision. Among other things, the charter may prescribe rights and voting powers of the members, relations between the members and governing bodies, voting rules (smart contract, staking of governance tokens, majority for approval of decisions), etc.

📚 Read more: Intro to DAO governance: a guide for Web3 founders.

Getting started with your DAO Legal Wrapper

If you need a Legal Wrapper for your DAO and are planning, among other things, to establish your legal wrapper in one of the most reputable jurisdictions available, to attract investments and have full access to fiat currencies transactions, for example, you may want to consider Switzerland as an option. 

Book a Legal Discovery Session with the Head of Web3 Legal at Legal Nodes to learn more about this option and compare other options for DAO Legal Wrappers. During the session, you will be given:

  • an intro to crypto-friendly countries–specifically which ones may be the best jurisdictions for your DAO;
  • an intro to token legal design to better understand all the implications of issuing a token; and 
  • a checklist of all to-do's to launch your own DAO Legal Wrapper.

Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.

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Taras is a Web3-focused Virtual Legal Officer at Legal Nodes. Since 2018, he has had various projects under his belt, ranging from M&A transactions and ICO management to handling matters concerning Ukrainian laws on virtual assets. Taras loves writing helpful guides on Web3 legal topics and draws his inspiration from doing sports and reading books (his passion is the history of the 20th century).

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