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Navigating the Maze: DAO Legal Structures Across Countries

DAO Specific Structures

Sep 25, 2023

Decentralized Autonomous Organizations (DAOs), being a new type of organizational structure, have the challenge of navigating the global regulatory landscape. Regulations are constantly evolving and there are countless countries and jurisdictions to consider. The type of entity a DAO may register as varies as well depending on factors such as the nature of the DAO itself and its operational activities. Understanding all of your options is crucial.

In my previous article, "Navigating the Maze: Choosing a Legal Entity Structure for a DAO", we explored these potential legal entity (LE) structures that DAOs can utilize to address the concerns of unlimited liability for both the DAO and its members, including the pros and cons associated with each framework. While there are numerous jurisdictions to consider, we will focus on the most prevalent ones – those that have progressively recognized DAOs as distinct LEs.

Summary

While many countries have adopted a forward approach toward DAO incorporation, others remain less accommodating. When selecting a jurisdiction, its essential to determine early on what factors are important for your DAO.

Countries Embracing the DAO Landscape

Panama - Foundation

Panama stands out with its progressive stance on digital assets, as they don’t classify them as securities or commodities. The country is also a free economic zone with consistent and coherent rules and regulations.

Best For: All DAOs (Protocol, Network, Social, Investment, Cooperative, Collective, Charity)

Registration Requirements:

The term “Foundation” must be included in the entity’s legal name.

Pros:

Limited Liability: Members are protected; creditors cannot go after their assets.
Asset Protection: Assets are safeguarded against seizures from any governing authority.
Anonymity: Members and founders are not required to disclose themselves.
Relaxed KYC: Disclosures are not mandatory and only beneficiaries have to provide personal information.
Operational Flexibility: DAOs are free to establish their own rules, rights, and agreements for their members.
Inclusive Activities: There are no activity restrictions for DAOs, including commercial activities, as long as they remain compliant with applicable laws and operate ethically.
Tax Incentives: Foundations can hold international assets without tax implications, beneficiary tax documents are not requested, and the country refrains from income or tax withholdings.
Public Token Sale: No permit is necessary to launch a public token.
Affordable: Setup and operational costs are reasonable compared to many other jurisdictions.
Quick Setup: The process ranges from 24 hours to 2 weeks, with payment options for expedited formation.

Cons:

Board/Council: A councillor or board of councillors must be established (can consist of individuals or entities) to oversee the day-to-day activities of the DAO. However, the founder(s) can decide the council’s rights.

Marshall Islands - DAO LLC

In 2022, Marshall Islands became a global leader by recognizing DAOs as distinct legal entities with the passing of the DAO Act of 2022. While the country had previously amended its Non-Profit LLC to include non-profit DAOs exclusively, now all DAOs, non-profit or for-profit, can incorporate there, each with its particular set of rules.

Best For: All DAOs

Registration Requirements:

MIDAO, the regulatory authority of Marshall Islands, requires the DAO’s name and its purpose (the activities it will participate in) to be defined at registration.
At least 1 person must be listed on registration (can be an individual or legal personnel). The individual does not have to be a member of the DAO.
The term “DAO LLC” must be in the entity’s legal name.
The smart contract used to operate the DAO must be publicly available.

Pros:

Simple Incorporation: Rules and requirements are easy to comprehend.
Limited Liability: Members are protected.
Relaxed KYC: Only significant voting rights holders or beneficiaries are required to report their personal information.
Operational Flexibility: DAOs are free to establish their own rules, rights, and agreements for their members.
Inclusive Activities: There are no activity restrictions for DAOs, including commercial activities, as long as they remain compliant with applicable laws and operate ethically.
Public Token Sale: No permit is necessary to launch a public token.
Ownership Rights: DAOs can own property and operate as a tax entity.
US Affiliation: Incorporating here is beneficial for US citizens due the free association between Marshall Islands and the US.
Legal Flexibility: Multiple legal systems are available.
Affordable: Setup and operational costs are reasonable.

Cons:

Complex: Regulations and requirements are burdensome.
Registered Agent: The DAO must obtain a local registered agent (MIDAO) to form a DAO LLC.
Limited Anonymity: Members must be listed on a plain text document or in the DAO’s smart contract.
Annual Reporting: MIDAO requires annual reports submissions.
Long Setup Time: A range of 30-60 days for registration and licensing.

Cayman Islands – Foundation

Positioned as a premier global financial hub, the Cayman Islands has been a go-to destination for many financial entities and has recently adapted its regulations to cater to the unique structure and needs of DAO.

Best For: All DAOs

Registration Requirements:

At least 1 member and 2 local directors must be listed on registration.

Pros:

Limited Liability: Members are protected.
Clear laws: Rules are easy to understand and follow.
Operational Flexibility: DAOs are free to establish their own rules, rights, and agreements for their members.
Inclusive Activities: There are no activity restrictions for DAOs, including commercial activities, as long as they remain compliant with applicable laws and operate ethically.
Number of Members: DAOs can decide to have no members or shareholders at any time. They must however select at least 1 supervisor (ex: founder, director) to enforce rules and have access to important information (books, records, accounts, etc.).
Quick Setup: Between 2-4 weeks to incorporate.

Cons:

Expensive: Setup costs and annual fees are high.
Strict KYC standards
Complex: Regulations and requirements are burdensome.
Registered Agent: The DAO must obtain a registered agent or residency in the country.
Directors: The foundation must have local directors that oversee the DAO, but they have limitations such as adhering to the DAO’s explicit objectives.
Virtual Asset Service Providers Act (VASP Act): Cayman has specific requirements for digital assets.
Off-chain Actions: Certain actions must be taken by individuals who are not members of the DAO (ex: directors).

United States: Wyoming - DAO LLC

A few states in the US have integrated DAOs into their legal framework. Wyoming has transpired as the best state for DAO registration due to its (almost) all-encompassing structure.

Best For: All DAOs except protocols

Registration Requirements:

The term “DAO” must be in the entity’s legal name.
The DAO’s smart contract must be included in the Articles of Organization and amended when changes are made. However, if there are any disparities between the smart contract and Articles of Organization, the smart contract will always take precedence.

Pros:

Simple Incorporation: Rules and requirements are easy to comprehend.
Limited Liability: Members are protected. They have no fiduciary responsibility over the DAO and are not liable for its debts.
Tax Incentives: There are potential tax savings for US citizens.
Common Law System: The US legal government allows for flexibility.
Affordable: Setup and operational costs are reasonable.
Quick Setup: Incorporation takes 2 weeks.

Cons:

Limited Anonymity: Corporate Transparency Act restricts anonymity.
Protocol DAO Limitations: Protocol DAOs are ineligible to register due to voting requirements.
Dissolution Risk: If there is no activity for 1 year, the LLC will automatically dissolve.
Registered Agent: The DAO must obtain a local registered agent or residency in the state.
Uncertainty: There is a lot of regulatory and tax uncertainty in the US.

Note: Other states that have taken a forward approach to include DAOs and blockchain: Vermont and Tennessee.

Hong Kong: Company (Limited by Guarantee)

Hong Kong is also notorious for its sophisticated legal system and forward-thinking approach, offering an attractive environment for DAOs.

Best For: Non-profit or charitable DAOs

Registration Requirements:

Must have at least 1 member, 2 directors, 1 local secretary, and a designated representative.

Pros:

Limited Liability: The contributor’s liability is limited.
Donations and Transferability: DAOs can receive donations and transfer funds to the charities of their choosing.
Tax Incentives: Any income generated outside of Hong Kong is usually non-taxable.
Affordable: Setup and operational costs are reasonable.
Quick Setup: Incorporation takes 2-6 days.

Cons:

Limited Activities: The DAO can participate in non-profit activities. Yet, they can partake in certain commercial activities.
Profits Limitations: All profits the DAO generates cannot be distributed to its members.
Directors: The foundation must have directors that oversee the DAO, but the directors don’t have to be local.
Registered Agent: The DAO must obtain a local registered agent or residency in the country.
Limited Autonomy: Registration requires a lot of people to oversee the DAO.

Disclaimer

The legal landscape surrounding DAOs is continually evolving, and new laws and regulations are continuously being implemented. It's crucial to seek legal counsel, perform due diligence, and ensure you have the most current and accurate information for each jurisdiction you are interested in.

References

Dubnevych, Nestor. “The Best Entities and Countries for DAO Registration in 2023.” Legal Nodes - A Legal Platform for Global Companies, Legal Nodes, 28 June 2023, legalnodes.com/article/choose-a-crypto-friendly-country-for-dao.

Ghavi, Amir, et al. “A Primer on DAOs.” The Harvard Law School Forum on Corporate Governance, 17 Sept. 2022, corpgov.law.harvard.edu/2022/09/17/a-primer-on-daos/#:~:text=Although%20Delaware%20has%20not%20recognized,been%20formed%20as%20Delaware%20LLCs.

Harrington, Mark. “Benefits of Setting Up a Foundation in Panama.” Korporatio, 8 Apr. 2023, korporatio.com/2023/03/02/benefits-of-setting-up-a-foundation-in-panama/.

Harrington, Mark. “Best Country to Incorporate a DAO.” Korporatio, 13 Apr. 2023, korporatio.com/2023/04/11/best-country-to-incorporate-a-dao/#What_countries_are_best_for_incorporating_a_DAO.

Lawrence, Damilola. “What Is the Marshall Islands DAO Act and Is It Legit?” Cryptopolitan, 1 June 2023, www.cryptopolitan.com/what-is-the-marshall-islands-dao-act/#:~:text=The%20DAO%20Act%20of%202022%2C%20passed%20by%20the%20RMI%2C%20is,jurisdiction%20of%20the%20Marshall%20Islands.

Offshore Companies International. “Panama Foundation DAOs.” Offshore Companies International, offshoreincorporate.com/panama-foundation-daos/. 2023.

O’Melveny & Myers LLP. “Daos: Looking For Limited Liability & Legal Personality.” DAOs: Looking for Limited Liability & Legal Personality, www.omm.com/resources/alerts-and-publications/alerts/daos-looking-for-limited-liability-and-legal-personality/#:~:text=Colorado%20Uniform%20Limited%20Cooperative%20Association,a%20corporation%20and%20an%20LLC.

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