Cayman Foundation as a DAO Legal Wrapper: Comprehensive Guide

Ultimate guide to Cayman foundations as DAO legal wrappers: formation procedure, governance models, benefits, legal and compliance implications, fees and costs involved. Create DAO legal wrapper

Introduction

Are you looking to create a legal wrapper for your DAO or Web3 organization, and considering a Cayman foundation for these purposes? This article by DAObox explores why the Cayman foundation is an excellent legal wrapper for DAOs, detailing its features, formation process, costs, and compliance requirements.

By the end of this guide, you'll have a clear understanding of how to leverage the Cayman foundation to enhance your DAO's operations and regulatory standing.

Understanding Cayman Foundations

What is a Cayman Foundation?

A Cayman foundation – is a legal entity that blends features of corporations and trusts. In the context of DAO legal wrappers, we’re talking about ownerless foundations – orphan organizations created for specific purposes which have no shareholders.

Established under the Foundation Companies Act of 2017, a foundation is created not to generate profits for shareholders, but to support specific purposes outlined in its constitutional documents. Unlike traditional entities, a Cayman ownerless foundation does not have shareholders and offers high flexibility in terms of governance configuration, making it highly suitable for use as a DAO legal wrapper.

Owing to these features, a Cayman foundation DAO wrapper can even 'outlive' the founding team and core contributors of the project, potentially lasting indefinitely — as long as it has objectives to pursue and resources to finance operations. By having a perpetual entity, the foundation can ensure that long-term projects and objectives are pursued consistently, without disruption due to changes in the team composition or DAO contributors.

Purposes of the Foundation

Since this DAO legal wrapper is established for specific objectives, it is critical that the foundation's purposes are properly drafted and formulated. The purposes of the Cayman foundation DAO wrapper could include the development of a specific blockchain protocol and related infrastructure, facilitating the protocol’s decentralization, promoting and marketing the protocol and associated services, financing certain activities or endeavors, and more.

The purposes should be broad enough to ensure that the foundation can engage in all necessary activities while restricting the authority of the directors to matters within the scope of these purposes. This ensures that the foundation remains focused on its mission and prevents any deviation from its core objectives.

Management & Governance

Typically, a Cayman Islands ownerless foundation DAO wrapper is managed by a board of directors under the supervision of a supervisor. However, the foundation is highly flexible in terms of governance, therefore, the governance model can be enhanced or adapted to the specific needs of the DAO.

Unlike traditional corporations, in an ownerless foundation, the directors owe fiduciary duties to the purposes of the foundation rather than to the interests of shareholders, which is essential for structuring the DAO and protecting its property. The supervisor, responsible for overseeing the board of directors and ensuring they act in accordance with the foundation’s purposes and constitution, also has a fiduciary duty to enforce the foundation's purposes.

This setup ensures that no single person can usurp power within the wrapper, and requires the management of the entity to always align their actions with the declared purposes, thereby mitigating various attack vectors. When structured properly, an ownerless foundation not only enhances but also fuels decentralization, ensuring that ultimate control remains with the DAO members.

Advantages of a Cayman Foundation Wrapper

As a DAO legal wrapper, Cayman Islands ownerless foundation has numerous advantages compared to other forms of legal wrappers, and even those ownerless foundations created in other jurisdictions.

• Legal Personality: A Cayman foundation is an entity having its own legal personality, which allows it to enter into contracts, own property and rights, and be party to legal actions independently from its members or managers. This separation ensures that the property of the foundation is legally protected, and that it can interact seamlessly with traditional financial and legal systems.

• Limited Liability: Same as any other legal wrapper, a Cayman foundation can offer limited liability protection to the DAO members and core contributors, shielding them from personal liability in relation to any acts and activities carried out through the foundation.

• No Members/Shareholders: Since the foundation can have no members or shareholders, it can be fully subordinated to the purposes and objectives of the DAO, ensuring that no individual has the authority to intervene (unless permitted by constitution).

• Flexibility in Governance: The governance in the Cayman foundation is fairly flexible, so it can be tailored to meet the specific needs of the DAO and align with its on-chain governance model and associated procedures. This flexibility allows DAOs to design governance structures that align closely with their operational models and community ethos​

• Asset Protection: Assets held by the foundation are segregated from personal liabilities of its directors/supervisors and the DAO generally, ensuring robust protection against external claims. This ring-fencing of assets is particularly beneficial for DAOs managing significant digital assets or intellectual property.

• Tax Neutrality: The Cayman Islands offer a tax-neutral environment with no income, corporation, capital gains, or inheritance taxes, making it economically efficient for DAOs. This tax neutrality maximizes the efficiency of the DAO's resource allocation and financial planning​, but prohibits the foundation from making any distributions amongst its members.

• Reputation and Compliance: The Cayman Islands are recognized for their strong compliance with international regulatory standards, giving your DAO a stamp of credibility in the global arena. This regulatory compliance ensures that DAOs can operate within a legally sound framework while maintaining transparency and accountability​.

Legal and Regulatory Compliance

The Cayman Islands, as a jurisdiction for creating a DAO legal wrapper, has specific requirements that must be met to ensure that the wrapper is operational and compliant with legal and regulatory standards. It is critical that the DAO core contributors understand these requirements and specificities before approaching the DAO legal wrapper design and formation phase.

Economic Substance Requirements

If a Cayman entity engages in certain ‘relevant’ activities, it may be required to demonstrate substantial economic presence in the Cayman Islands. This includes maintaining physical offices, hiring local employees, and conducting core income-generating activities within the jurisdiction. Ultimately, these economic substance requirements aim to ensure that entities benefiting from the Cayman Islands’ favorable tax regime have a real economic presence in the country and are not merely incorporated there to avoid taxes in other jurisdictions.

Relevant activities under the ES law include, but are not limited to: banking, insurance, fund management, financing and leasing, headquarters, shipping, pure holding company activities, intellectual property business, distribution and service center business.

Therefore, for DAOs considering a Cayman Islands foundation as a legal wrapper, it is crucial to evaluate whether the foundation’s anticipated activities will trigger the ES requirements and whether the DAO is willing to comply with associated obligations. If not, it should be assessed whether the legal wrapper’s structure can be modified to avoid unnecessary or undesired compliance burden.

Conversely, if the legal wrapper’s activities do not fall within the scope of ES laws, the foundation will not be required to demonstrate economic presence in the Cayman Islands. This can be advantageous for DAOs that wish to maintain a minimal physical footprint while still benefiting from the Cayman Islands’ favorable regulatory and tax environment.

VASP Regulations

The Cayman Islands Virtual Asset (Service Provider) Act regulates entities involved in specific virtual asset services 'as a business', including the issuance, custody, and trading of virtual assets such as cryptocurrencies and tokens. The regulation aims to ensure that entities engaging in these activities comply with international standards for anti-money laundering (AML) and counter-terrorist financing (CTF).

One of the distinctive features of the Cayman VASP laws is that the sale of newly issued virtual assets (tokens) to the public is considered a regulated activity. In other words, in order to sell a token that does not yet have a market to open public, a Cayman entity must become regulated and comply with the VASP Act requirements. Note that this includes exchanging the tokens for any form of consideration.

When structuring a DAO in the Cayman Islands, it is crucial to assess whether the anticipated activities of the legal wrapper will fall under the purview of the VASP Act. If the DAO’s activities involve issuing, holding, or trading virtual assets, it must comply with the VASP Act's registration, licensing, and operational requirements. Conversely, if the DAO's activities do not involve these services, it can avoid the complexities and costs associated with VASP compliance.

Financial and Securities Laws

In addition to the VASP Act, the Cayman Islands have existing regulatory frameworks applicable to traditional financial and securities markets, including securities laws, mutual funds and insurance regulations.

These regulations can, in certain instances, apply to activities involving virtual assets, depending on the nature of the operations. Therefore, when structuring a DAO legal wrapper in the Cayman Islands, it is also essential to understand how these financial laws might apply to the anticipated activities of the foundation. If the foundation engages in activities that fall under the securities or financial laws or regulations, it must comply with the relevant requirements.

UBO Reporting and KYC

The foundation is required to identify and report its ultimate beneficial owners (UBOs). In the Cayman Islands, the ‘UBO’ refers to any individual with 25% or more voting power, or who can appoint or remove the majority of the board of directors, or otherwise exercises substantial control over the wrapper. In the absence of other UBOs, the directors and supervisor of the foundation are often considered the UBOs.

Every UBO is required to undergo identification and KYC screening, which includes submitting a passport, proof of address and certain personal information.

For those DAOs that aren’t comfortable with revealing their core members’ identities, taking additional legal exposure or other risks, DAObox offers its signature legal wrapper management service. As part of this service, in addition to other responsibilities, we assume positions of director and/or supervisor in the Cayman foundation wrapper and, in this capacity, undergo identification and KYC checks ourselves. This allows the DAO members and contributors to avoid disclosing their identities or taking additional exposure. For more details on the service, please refer to the link above.

Creating Cayman Foundation DAO Legal Wrapper

DAObox is a full-service company for designing, creating and managing DAO legal wrappers globally. At DAObox, we deliver only ready-made legal wrappers, tailored to the specific needs and purposes of a DAO, focusing on:

• Educating the DAO members and key contributors;

• Designing the legal wrapper, properly integrating it into the DAO ecosystem;

• Establishing proper control, safety and emergency procedures;

• Addressing regulatory and compliance implications;

• Ensuring sufficient decentralization, while preserving the DAO’s control.

Formation of the Legal Wrapper

Legal wrapper formation starts with the design and preparation phase, during which we educate DAO members about the legal wrappers, including by participating in the AMAs and other events, design the wrapper in close cooperation with DAO’s core contributors, produce the necessary corporate documentation, and prepare everything required to form a legal wrapper.

After the design and preparation phase is complete, the formation and incorporation of the legal wrapper usually takes no more than 10 days.

Please refer to our Gearbox case study to learn more about how we designed and implemented a Cayman foundation legal wrapper for them, understand the roadmap and major structuring phases. You may contact us to learn more or book a free consultation, and navigate here to see our standard engagement procedure.

Operational Requirements

A Cayman foundation DAO legal wrapper is required to have at least one director and at least one supervisor. Any person can assume either or both of these positions, regardless of whether individual or body corporate, and whether resident in the Cayman Islands.

Furthermore, a Cayman foundation must at all times maintain a registered office address and registered agent within the Cayman Islands. Every year, the foundation must complete corporate continuation in order to be renewed for the next year of operation, which includes making the necessary filings and reportings, payment of the government fees, registered agent fees, and associated expenses.

Pricing: Cost of Cayman Foundation DAO Legal Wrapper

The price for our Cayman Foundation DAO wrappers begins at $13,500. This is DAObox’s all-in-one legal wrapper establishment fee, which includes:

• Designing the DAO legal wrapper, developing corporate architecture tailored to a DAO’s specific needs, requirements and existing on-chain procedures;

• Developing and implementing the necessary internal controls, checks and balances, and emergency procedures;

• Drafting all requisite corporate documentation, including memorandum and articles of association, and related corporate actions;

• Integrating the legal wrapper with the DAO and its on-chain procedures;

• Coordination and collaboration with the DAO’s core contributors, participation in AMA sessions, continuous guidance and support;

• All associated costs, including formation fees, first year’s government fees, registered agent’s services, and registered office cost.

With DAObox, you make a single payment with no additional costs incurred throughout the process.

Conclusion

A Cayman Islands ownerless foundation company can provide a robust and flexible legal structure for DAOs, offering legal recognition, limited liability, and a tax-neutral environment. By carefully designing the foundation's governance and ensuring compliance with local regulations, DAOs can leverage this structure to enhance their operations and achieve their strategic objectives.

Contact DAObox or schedule a free consultation to learn more and embark on your journey towards a secure, compliant, and efficient decentralized organization.