Knowledge

This briefing discusses the use of Cayman Islands foundation companies as decentralised autonomous organisations ("DAOs") and highlights some of the key considerations to bear in mind.

Please refer to our briefing on foundation companies for more information on this vehicle generally.

Introduction

As a DAO, by its nature, has no legal personality, it will have difficulties entering into contracts, holding assets and protecting its intellectual property.  Foundation companies offer a means for developers and DAOs to deal with those difficulties.

Key features of foundation companies

The key features of a foundation company that make it well suited to DAOs are:

• Ownerless – A foundation company may cease to have members so long as it has, at all times, one or more supervisors.
• Flexibility – The corporate governance of a foundation company is very flexible and duties, powers and rights of any type may be given to members, directors, officers, supervisors, founders or others. In practice, the articles of association may mirror the DAO structure.  Bylaws are legally binding on a foundation company and its directors and supervisors.  However, they are a private document that is not filed with the Registrar of Companies.
• Corporate status – A foundation company is a company incorporated under the Companies Act (Revised) and so it offers limited liability benefits, as well as the ability to own assets and enforce rights.
• Tax neutral – The Cayman Islands does not levy any form of income tax, capital gains tax, corporation tax or any other form of direct taxation. It also has a robust regulatory framework in respect of anti-money laundering, automatic exchange of tax information (CRS and FATCA) and economic substance.

Potential uses of foundation companies in connection with DAOs

A foundation company may be used for, amongst many others, the following purposes:

• to operate as a DAO, effectively as a wrapper around the DAO; in other words, to give the DAO a legal personality to allow it to transact with third parties and to hold assets and enforce rights;
• to act as a vehicle through which the DAO operates; and
• to act as a vehicle, independent of the DAO, that acts on the instructions of the DAO from time to time.

Things to bear in mind

• Virtual asset regulation – The Virtual Asset (Service Providers) Act (Revised) regulates the issuance of virtual assets and certain other related services. A thorough legal analysis, with the assistance of counsel, should be carried out to determine whether or not the foundation company must be registered or licenced with the Cayman Islands Monetary Authority.
• Onshore tax and regulation – The DAO (and the foundation company) should take legal and tax advice in the places where it will be operating, in particular if it is issuing tokens or offering services.
• Service providers – A foundation company must, as a minimum, maintain a registered office at and engage a secretary from a Cayman Islands licenced corporate service provider. We can make introductions to service providers with experience in the sector.

This is a very high-level summary of the law and practice and does not constitute legal advice.  If you have any questions about foundation companies, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.