Figure out the Legal Wrapper for your DAO

It is often assumed that the trust in a DAO does not need a legal structure, as the trust itself is based on the laws of maths, and also relies on blockchain consensus protocols. This may be partially true, however whenever a DAO plans to attain investment, from an individual or a venture fund, or begin signing legal documents–such as agreements with contractors–or listing a token on an exchange, problems begin to arise.

This is because a DAO needs to be incorporated, in order to undertake these actions. Essentially, a DAO needs some kind of “legal wrapper”, a setup in which it can operate in the business world, legally, with a framework that gives legal assurances to investors, governments, and business partners.

A legal wrapper is not only the scissors to bureaucratic red tape, it is a process that nudges members of the DAO to take the necessary steps and ask the right questions about how they can make the most out of their DAO, without hitting legal pitfalls and stumbling blocks.

An unregistered DAO can lead to multiple risks and barriers to a DAO’s optimal performance. Primarily, unregistered DAOs will struggle to form the relationships they want with investors, cryptocurrency exchanges, contractors, and other business and legal entities. There are also prominent legal risks associated with unregistered DAOs:

1. Judicial liability, whereby a non-incorporated DAO is recognised as a General Partnership, placing liability on every single member of the DAO, and putting them and their assets—at risk of legal proceedings.
2. Tax liability, whereby DAO members can face fines and penalties in the event of the non-incorporated DAO failing to pay the correct income taxes.
3. Financial (and even criminal) liability, whereby the routine procedure of attracting funds from new DAO members without following the required verification procedures, including checking the sources of the funds, could result in criminal investigations for financial crimes.

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The most popular, and therefore most common, means of DAO registration is a foundation, a self-owning entity, which allows members to make contributions to fund the DAO. The foundation does not have any owners (ie, members are not equivalent to shareholders of a company). 

That being said, members of the DAO foundation can vote on governance proposals and can elect a trusted person to act as Guardian or Supervisor. This special role ensures proper organisation and implementation of voted-on decisions. The DAO foundation owns the Treasury (the virtual assets that are to be used for foundation purposes only). The DAO members are entitled to vote on how the assets are used. Once a decision is arrived at, the Supervisor will open the Treasury and release the assets or finances required for the specific initiative that has been voted on by the members.

The foundation operates via statute, which sets goals on how the DAO can spend its funds, how members are to be accepted into the organisation, and the DAO governance rules, such as voting procedures. 

Choosing the best country depends on your legal needs and preferences, and the variety of different options available to you. There are three key criteria to consider when choosing the best location to incorporate and legally structure your DAO.

1. Do you wish your DAO to receive profit and distribute this profit amongst DAO members? If so, countries such as Panama, the Bahamas, and Liechtenstein are best. For non-profit DAOs, countries such as Switzerland, the Cayman Islands, or the British Virgin Islands are best.
2. Do you want your DAO to be able to make a public token sale? If so, some countries require permits, for example, you will need a VASP authorisation if your DAO is incorporated in the Cayman Islands or Singapore, whereas no permit would be required if your DAO is incorporated in Panama or the Marshall Islands. 
3. Finally, some countries require KYC procedures and maintenance of a register of DAO members. These countries include Switzerland, Liechtenstein, and Singapore. Other countries have fewer or even no KYC requirements, such as Panama, the British Virgin Islands, and the Marshall Islands.

There are many resources advising the best legal wrappers for your DAO, however each DAO is unique, and without proper legal guidance, your DAO legal wrapper may be insufficient or may underperform and hinder the growth of your DAO.

Speak with a Legal Nodes expert today and discover which legal solution is best for your DAO.