Legal structure for the Idle DAO

Authors

Treasury League

Summary

The legal research about a legal structure for the Idle DAO has been going on for several months already and we have been interacting with multiple legal advisors to form a clear opinion about this topic.

As already mentioned in a previous post, it’s fundamental that this new legal structure does not change the current relationship between Idle Protocol’s Governance framework and its existing ecosystem, without slowing down the protocol’s ability to adapt and grow but instead open the door to further innovation.

Idle adopted a spearheading DAO Governance innovation, with forefront Governance infrastructures like the Idle Leagues system that successfully allowed it to become a community-operated DAO, with dozen of active contributors that work on the day-to-day maintenance and growth of the protocol – for this reason, it is important not to impair privacy, integrations, growth, and innovation by adding legal friction points.

Problem

At the time of writing, it’s not possible to bridge the Idle DAO to traditional companies. A legal structure becomes crucial to enable this bridge, and it can be an important step that would add additional liquidity partners, increase the user base, increase the utility of $IDLE and put the Idle protocol ahead of the curve by making it able to interact with traditional companies.

The challenge, of course, is not letting this bridge create any impediments to the evolution of the protocol or add stress to the current governance model.

In short, we want to make the protocol available to “traditional-world” third-party integrations. Another motivation to set up a legal structure for the Idle DAO is to be able to establish legal agreements with other companies for useful services, which is something the Treasury League faces daily issues with the current DAO structure and creates challenges when we try to engage with corporate structures.

Simple tasks like providing task management tools or creating a common email address for League members get difficult without a legal structure. Another example are operational situations where Leagues members are required to sign contracts or execute fiat payments.

It is also critical that a new legal structure for Idle does not imply direct tax implications for $IDLE token holders. Our research has focused on legal structures that “buffer” the existing Idle ecosystem users from these new corporate accounts, and their legal structures, meaning in short that idle finance does not want to KYC its existing DeFi users.

Possible solution

TL;DR: After checking back with several legal advisors and discussing many alternatives (Wyoming DAO LLC included), it seems there might be two applicable frameworks:

  • an Offshore Foundation Model

  • a Delaware Unincorporated Nonprofit

Set out below is further detail on how the mechanics and architecture of the proposed structures will operate.

Offshore Foundation

A Foundation would be a way for the Idle DAO to keep Governance of the protocol while at the same time allow the project to interact with the real world.

The proposed jurisdiction for the Foundation, upon consultation with different legal advisors, is Cayman Island. As part of this Foundation setup, it needs to be ensured that the Foundation is decentralized in its governance, either from the outset or as the project matures.

The best way to achieve this is to make the Foundation founderless and memberless with a Nominee Director acting upon and executing all on-chain and off-chain decisions by the Idle token holders and/or Leagues.

The Leagues could act as Supervisors without taking direct executive roles. The Nominee Director will solely act as a “rubber-stamper”, meaning that no executive power lies at the Nominee Director: no access to Treasury Funds, not able to create or vote on both off-chain and on-chain Governance proposals.

The Foundation would then be able to provide grants to a US operational entity along with any other entities the community decides to give grants to. This will allow a good extend of flexibility to distribute funds. To distribute funds that have been granted by the community, it could be possible to have treasurers in place and the Treasury League can be used to control a multisig wallet.

Unincorporated Nonprofit Association

Alternatively (or even in pair with, cost notwithstanding), the DAO entity could be based on the Uniform Unincorporated Nonprofit Association Act (“UUNAA”).

The Offshore Foundation provides a very flexible framework for supporting off-chain functions for executing proposals passed through a DAO’s governance process, while the favorable tax regime provides DAOs with potential tax savings in regard to their treasuries. The high expenses of creating these Foreign Foundations are typically the main barrier to entry. There are also substantial concerns involved with an offshore approach, which revolve around whether or not Idle DAO will effectively have a US trade or business.

Bearing this in mind, we have been advised over a Delaware Unincorporated Nonprofit.

The purpose of the entity is to enable the Idle DAO to pursue funding innovation in DeFi functionality and initiatives that promote the societal benefits of DeFi.

Idle DAO formed a treasury in November 2020 for the purpose of developing future technologies and advancing the interests of the Idle DAO community and the underlying technology protocol. From then on, the Governance outlined the spending dynamics that could be performed by the Idle DAO treasury, while part of the governance tokens themselves have been and still are distributed to users and community members. As a consequence, the Idle DAO could be potentially eligible to be considered a Delaware Unincorporated Nonprofit Association, as would this entity’s purpose of serving the objective of developing the Idle ecosystem and underlying technologies.

The members of the Delaware Unincorporated Nonprofit would be subject to the DAO’s governance protocols in the same way foundations have been utilized, with on-chain governance being written into their duties to minimize any off-chain decision making that should be controlled by governance.

In practice, the proposed entity’s interaction with the DAO’s treasury and the disbursement of assets could be designed in a trustless and on-chain manner.

Conclusion and next step

Abstaining to adopt a legal entity (either US or offshore), would lead to potential risks that the developers and members of a DAO would bear: (i) restricted from engaging in operations, (ii) held liable for any harm resulting from DAO activities and (iii) held liable for income tax liabilities associated with a protocol’s operation and issuances of a treasury’s governance tokens.

The current Treasury League is excited and fully supportive of this initiative.

We are keen to hear what the $IDLE community thinks about this proposal, and if no objections will arise in the following 5 days (until 2021-09-29T17:00:00Z), the Treasury League will take this analysis further with legal counsels and move forward by using the budget to set up the legal entity that is more convenient and cost-effective at the present time and stage of the DAO.

References:

8 Likes

This makes me excited, love seeing IDLE reach for the masses
Looking forward to seeing this move ahead

Keeping the standard high and legit :ok_hand::hugs:

6 Likes

Since there is so much regulatory uncertainty, I support the creation of both legal structures:
the Offshore Foundation Model and the Delaware Unincorporated Nonprofit.

This will put Idle Finance in the privileged position where potential institutional partners can select to interact with Idle’s legal structure that fits them the best.

5 Likes

Sensible though The Unincorporated Non-profit has little or no precedent in DeFi projects and risk dragging the decentralized, community-owned part (vs the operational part) into the US where there is a lot of nuance (and compliance!) around tax for charitable entities and the liability distribution esp. for non-incorporated entities may not be beneficial to its users. In our opinion it may be better to wrap the project in an offshore, “faceless” foundation such as the Cayman memberless Foundation and only have an operational entity (e.g. C-Corp) in the US as a recipient of grants by the Foundation following an onchain vote.

3 Likes

Why you prefer a c-corp instead of the LLC?
Asking for a fren…

2 Likes

Because you could attract investors in a C-Corp who may want equity whilst an LLC is not investor friendly at least not for VC-type investors.

3 Likes

Got it! Thank you ser