[AIP22.2 - Option 2 Daobox]
DAObox – Abracadabra Finance | Offer on the DAO Legal Wrapper Structuring
We have been following the discussions within the Abracadabra Finance DAO regarding the legal structuring of the DAO and establishing a proper legal wrapper for this purpose. After reviewing these discussions and gaining an understanding of the issue, DAObox wishes to present the following draft proposal to the Abracadabra Finance DAO concerning the structuring of the DAO and associated matters.
This is a bit of a longread, but given the complexity of the topic, even here we had to omit certain aspects and elements. We tried to structure this proposal in an easily understandable manner so that the Abracadabra DAO members could easily navigate this post and understand the main points even if they have no legal background. This post is further designed to allow the DAO members to educate themselves about the DAO legal structuring and major issues that have to be addressed. Even if the DAO decides not to engage DAObox, this information will be useful.
Background
DAObox is a provider of infrastructure solutions for DAOs and Web3 communities. Founded by “crypto lawyers” from the AURUM Law Firm, DAObox has a strong background in working with Web3 projects and DAOs on various matters. These include both legal and non-legal aspects such as designing and forming DAOs, establishing governance procedures, implementing control and management systems, forming sub-DAOs, etc.
Our flagship product is the fully-managed DAO legal wrapper service. This comprehensive, turn-key solution covers all pivotal aspects involved in creating, operating, and maintaining DAO legal structures, also known as legal wrappers.
DAObox as a Service
The Daobox service, simply put, consists of creating full-fledged legal structures for DAOs which our team then manages and operates. To get a better understanding of how things work and why Daobox’s offering is unparalleled in the market, please refer to our recent Gearbox DAO Case Study.
Formation
During the formation phase, instead of placing this responsibility on the core DAO contributors, the DAO engages DAObox to act as a founder of the structure, undergo all KYC checks and screenings, and manage all company formation matters.
Our practice shows that the DAO’s contributors and multisig controllers often prefer to stay out of any legal arrangements, remain anonymous, and avoid any legal exposure, which sometimes results in a situation where there is no one who could take the lead in the creation and management of the DAO legal structure. And we designed our service to perfectly address these situations.
Operation
After incorporation, DAObox assumes the positions of director and supervisor (if required) in the newly established legal wrapper, and assigns the team to operate the structure and administer its day-to-day operations within the mandate and under the supervision of the DAO. In essence, DAObox conducts the actual administration of the legal wrapper, thereby negating the need for the DAO to hire C-level managers, service providers, and other personnel who would typically be required to manage and operate the new structure. Hence, DAObox covers all essential aspects of the wrapper operation as well.
Structuring Model
Our approach diverges from other models in the market, resulting in the creation of a legal structure that is entirely subordinate to the DAO and fosters its decentralisation. We know how to design such structures properly, recognising the intricate dynamics and unique interactions between the DAO and its legal wrapper. DAObox further guides the DAO on the matters pertaining to the DAO<>wrapper relations and how to design them in the most efficient manner.
For a better understanding of differences in structuring approaches, please refer to our recent article, in which we explain the oversights and errors made by Arbitrum DAO and Hector DAO in structuring their DAOs.
Legal Wrapper
A legal wrapper is fundamentally a legal entity with its own distinct legal identity and personality. The legal wrapper is not the same as a DAO, so it does not replace or absorb the decentralised organisation that continues to exist as is.
We suggest thinking of a legal wrapper as one of elements of the DAO ecosystem, like a contributor concentrating on a specific range of objectives designated by the DAO. This means that a DAO continues to operate on-chain, and the legal wrapper only takes charge of certain operations entrusted by the DAO, mostly taking place off the blockchain. Therefore, there might be many legal wrappers (legal entities) within the ecosystem of the project with different areas of responsibilities. For a better understanding of this approach, please refer to our framework for utilising legal wrappers in DAO ecosystems or this article on “BORGs” by Delphi Labs.
Proposal: General
Overview of Suggested Structure
The legal wrapper, as we envisage it, will serve a common goal and not any particular person or group; as such, the purpose of the legal wrapper will be to facilitate the assignments determined by the Abracadabra DAO regardless of who is “in charge.” To put it another way, even if all current DAO contributors decide to leave at once, the legal wrapper will continue to serve the needs of the Abracadabra DAO and protocol as long as it has resources.
Another crucial factor to consider is that by commissioning an external team to oversee and administer the DAO wrapper, the organisation can further cultivate and augment its decentralisation. In such an arrangement, the power won’t be monopolised by affiliates or core contributors, which acts as an additional safeguard employed by the DAO.
Management and Operations
As mentioned above, DAObox will assume all managerial positions in the newly established structure which have to be filled in. For example, in a foundation company, unless the DAO determines otherwise, this would normally include positions of director and supervisor (but would depend on the jurisdiction of incorporation as explained below).
In truth, the situation unfolds as described: DAObox effectively steps into the role of manager for the legal wrapper, assigning personnel to handle its affairs and daily business. Consequently, the DAO doesn’t need to allocate additional personnel or contributors to manage the operations of the legal wrapper, unless it chooses to or unless the volume of work exceeds the standard expected level.
Major Use Cases
The legal wrapper can be used by the DAO to manage those activities that cannot be carried out off-chain, e.g., hiring developers, renting servers, paying for services, subscriptions and infrastructure, including in fiat, giving grants, concluding agreements and so forth. The wrapper can be further used to hold, manage and protect off-chain assets, such as fiat funds, IP, trademarks, domain names, etc. Of course, the wrapper can further be engaged in on-chain operations on an as-needed basis.
Lastly, the legal wrapper protects the DAO members and multisig controllers against liability that is related to acts and activities of the entity – normally, the legal wrapper itself will be responsible for any transactions that it performs (excluding certain exceptions under the law).
In reality, the use cases for the wrapper are remarkably diverse, implying that it can essentially serve any purpose that the DAO deems necessary.
Control
The issue of control is an important one as in the future, the legal wrapper may be holding and managing certain valuable assets belonging to the DAO (if DAO ever decides to transfer those to the legal vehicle). In short, although DAObox will be taking the managerial positions, the Abracadabra DAO will have the ultimate control over the legal wrapper and our actions will be limited by the mandate given by the DAO.
The constitutional documents, as designed by DAObox, will subordinate its governing bodies and management to the DAO and resolutions adopted by on-chain voting, whether via Snapshot or otherwise, to the maximum extent possible. Any such resolutions will be binding upon the legal entity and its management.
Furthermore, the constitutional documents will limit the authority of managers on the disposition of material assets and intellectual property held by the legal vehicle, entering into transactions the value of which exceeds USD $30,000 (or another threshold set by the DAO), and performing certain other material actions – any such acts will require the consent of the DAO. Normally, any spending of funds will be in accordance with the quarterly/semi-annual/annual plans (budget) adopted by the DAO.
As the legal wrapper will be subordinated to the Abracadabra DAO, the DAO can pass a resolution on replacing us as managers of the legal entity at any time, as well as on the change of the composition of the managerial bodies, and such resolution shall be binding.
Lastly, as part of a contingency plan, the DAO will possess the ability to designate a representative or assemble a team of trusted agents who will be endowed with the necessary authority to execute enforcement actions with respect to the wrapper as may be required to protect the DAO in any emergency situations.
Reporting
We will be providing reports on the material operations of the legal wrapper and financial transactions on a quarterly basis so that everything stays transparent. Also, we will be here to respond to your queries and questions or (perhaps) hold AMA sessions if that would be desired.
Risks Assumed by DAObox
As managers and the only persons responsible for the operation of the legal wrapper, we are essentially taking all the risks arising in connection with the operation of the legal wrapper and DAO activities carried out via the legal entity. As mentioned above, the very need for such a service is, among others, dictated by the fact that any manager or controller of the legal entity can potentially be exposed.
For example, any document executed will have our signatures on it, and in any action that can in the future be brought against the DAO, whether due to regulatory reasons or otherwise, both the legal wrapper and we will likely be targeted. Other than legal, there are further reputational, economical, and regulatory risks involved.
As lawyers, we naturally feel more comfortable than others in dealing with the risks. While we implement mechanisms and practices aimed at mitigating major risks, it’s important to acknowledge that certain risks still persist and could potentially be quite serious and resource-intensive.
Proposal: Details
Scope of Engagement
With respect to the legal wrapper, DAObox will be acting as hired managers under the supervision and control of the Abracadabra DAO. The high-level scope of proposed engagement includes:
- Designing the legal wrapper;
- Drafting comprehensive constitutional documents;
- Implementing control mechanisms, system of checks and balances;
- Forming and incorporating the legal wrapper as founders;
- Acting as director/manager/supervisor;
- Administering wrapper’s operations and day-to-day activities;
- Performing general legal supervision.
Responsibilities
We expect these to be the main areas of our responsibility:
- Representing and acting on behalf of the legal wrapper;
- Supporting the legal structure;
- Entering into contracts;
- Engaging in real-world transactions;
- Holding and protecting intellectual property, trademarks and domain names;
- Owning and managing property and assets entrusted by the DAO to the wrapper;
- Enabling access to fiat payments;
- Engaging and managing contributors, service provides and personnel;
- Issuing grants and similar incentives;
- Engaging auditors;
- Managing services, subscriptions, and infrastructure;
- Business correspondence;
- Improving overall reputation and appearance;
- Fuelling decentralisation of the whole organisation.
We do not feel like our engagement with Abracadabra DAO has to be limited by hours of work at the moment, but if the engagement scales substantially resulting in the need for extra resources to be allocated, we will need additional (reasonable) funding to be provided to cover the expense.
Note that this offer does not cover any legal services and DAObox will not be acting as a legal advisor. However, both DAObox and Abracadabra DAO can engage AURUM Law Firm for any legal assignments or tasks.
Proposed Structures
First of all, we acknowledge that the Abracadabra DAO passed a resolution on the choice of jurisdiction for the anticipated legal wrapper. According to this resolution, the wrapper is to be established in Switzerland.
We do not consider Switzerland to be the most optimal location for structuring the DAO legal wrapper for reasons briefly outlined below. Consequently, our proposal is divided into two sections, each proposing alternative structuring options for the DAO’s consideration. Nevertheless, we respect the DAO’s decision and stand prepared to proceed with the structuring according to the resolution passed.
Switzerland
There are two types of Swiss structures to consider for DAO structuring: the foundation and the association. Our recommendation is to establish either one of these entities in the renowned ‘Crypto Valley’, the Canton of Zug, known for its favourable regulatory environment.
Swiss foundations are well-suited for use as developer-centric structures, wherein the core team establishes and manages the foundation. Many blockchain protocols, such as Ethereum, Solana, Tezos, and DYDX utilise the Swiss foundation structure to operate their grant programs. In such cases, the funds raised during the ICO are allocated to the foundation and then distributed by its board.
Here, the primary downside in terms of decentralisation is that these types of organisations cannot be effectively integrated under the governance of a DAO. This could potentially lead to governance challenges where the foundation’s board assumes unlimited control over the organisation, as occurred during the Tezos conflict. This may result in a loss of developmental momentum and lead to protracted legal battles that lasted three years in the case of Tezos.
The constitutional document is the Deed of Foundation. The wording of the “Purpose” is particularly important, as all subsequent activities of the foundation must be aligned with this purpose. The foundation must have a board consisting of at least three members, with at least one member domiciled in Switzerland. The board convenes a few times a year to decide on the foundation’s strategy and spending policy. The foundation can employ staff and management, with the managing director reporting to the foundation board. The founder initially decides on the board composition, and subsequently, the foundation elects its members through co-optation. The foundation can also own subsidiaries with operating businesses. Each foundation must appoint an auditor or audit company to review its financial statements.
Swiss foundations are subject to state supervision carried out by the Federal Supervisory Board for Foundations (FSBF), which means that the DAO won’t be able to appoint its own supervisor. The supervisory authority must ensure that the foundation assets are used in accordance with its purposes, which allows it to intervene in the operations of the foundation if it deems that the same is necessary.
A Swiss association is a more flexible structure, but has its cons. It must consist of at least two members who control the entity and can pass resolutions on significant matters, including changes to the purpose, statutes, or the election of the management. One member has one vote. The board of association is responsible for the day-to-day management.
While there are instances of digital voting within Swiss associations, we know, however, no examples of token ownership-based memberships within these associations. This necessitates the admission of as many members as possible to achieve adequate decentralisation at the corporate level; otherwise, as well as in the above example with the Swiss Foundation, a small group of members could jeopardise the whole structure.
Each association member must be admitted after undergoing identification procedures. This leads to uncertainty regarding whether the Abracadabra DAO will be able to assign a sufficient number of members to represent the organisation and ensure adequate protection against potential governance attack vectors.
Based on the foregoing, we consider a Swiss foundation to be a more preferable choice for structuring the Abracadabra DAO, as compared to a Swiss association. However, either structure can serve as a wrapper.
Cayman Islands
Since we consider the Cayman Islands ownerless foundation company to be one of the most efficient and flexible DAO legal wrapper structures that are currently available, we decided to mention it in our proposal. For a better understanding of the rationale, here are some of the advantages of a Cayman foundation over a Swiss foundation or association:
- a tax-exempt status, which can be a struggle in Switzerland;
- a much more cost-effective structure requiring fewer resources for both incorporation and facilitation of the structure;
- a more straightforward and expedited formation process;
- unparalleled flexibility in governance and management procedures – this structure can be tailored to the DAO’s specific needs and incorporate virtually any control and governance mechanisms, including real subordination to the DAO;
- local directors are not required;
- minimised reporting and accounting obligations, streamlining administrative tasks;
- enhanced privacy provisions whereby corporate registers and information are kept private.
The Cayman foundations are used as a legal wrapper by Arbitrum, Hector, SushiSwap, ENS, Maker (RWA division) DAOs, and many other Web3 organisations.
Fees and Engagement Terms
The proposed terms of our engagement:
(a) A two-year contract, which term can be extended thereafter. This won’t limit the DAO in its ability to have additional management appointed, as well as remove DAObox as managers at any time by a DAO resolution;
(b) 60,000 USDC as an annual fee (120k for 24 months, payable upfront), covering design, set-up, facilitation, and day-to-day management;
(c) A one-time $SPELL token allocation: 0.15% of the total $SPELL token supply, subject to a 1-year lock-up, with a 1-year linear vesting period thereafter.
We believe that a $5k monthly fee is a more than reasonable price for the scope of engagement that we undertake, covering design and formation of the wrapper, assignment of the necessary personnel, managing and operating the structure, and everything discussed elsewhere in this proposal. Such an amount would barely cover the salary of a single professional manager if the DAO would need to appoint its own personnel, not to mention all other aspects of our responsibilities.
For DAObox, the stable fee covers the basic costs and operating expenses, while the token allocation serves as our additional incentive and compensation for the risks assumed in connection with the management of the DAO legal structure. However, should the DAO be uncomfortable with the token allocation, whether due to economic or other reasons, we can redesign the proposal in the token part, taking these concerns into account. Note that if the DAObox’s supervision and management services are not required, we can issue a proposal covering the design and set-up of the wrapper only.
Costs Involved
The costs involved in the formation and continuation of the DAO legal wrapper are not included in DAObox’s fees. The costs will depend on the jurisdiction and form of the anticipated wrapper.
DAObox can work with any local service provider chosen by the DAO on the formation and corporate matters, so if there is a preferred service provider – just let us know. The same relates to the appointment of a local director in the case of a Swiss foundation or association, so if the DAO would suggest a Swiss resident be appointed for this purpose, this would reduce the overall cost (specified below).
Below you may find the approximate costs of our service providers whom we can engage, if and as may be necessary:
Swiss Foundation: $11,700 – a one-time formation fee (CHF 10,000), plus $2,100 (CHF 1,800) and $8,200 (CHF 7,000) annually for local address and Swiss nominal director, respectively, as required by the law. The nominal director will hold a titular position on the board and won’t be engaged in operations. There is also a minimum initial capital requirement of CHF 50,000 to be funded in any form, including in the form of crypto. This is not a fee, so these funds will remain at the disposal of the foundation.
Swiss Association: $5,800 (CHF 5,000) – a one-time formation fee, plus $2,100 (CHF 1,800) and $7,000 (CHF 6,000) annually for local address and Swiss nominal director, respectively, as required by the law. The nominal director will hold a titular position on the board and won’t be engaged in operations.
Cayman Foundation: $7,000, covering formation costs, local address and services of a local registered agent for the first year. No other costs should normally arise.
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I will be reviewing this forum from time to time and responding to your questions, so feel free to ask!
Legal Notice: This proposal is made by DAObox Inc. We are lawyers, but not your lawyers; nothing contained in this proposal or otherwise communicated by us on this forum is an offering of legal services or legal representation to any person.
[Option 2. DAObox. UPD: Re. Swiss Association]
Taking into account the latest resolution passed by the Abracadabra DAO, according to which the Swiss association was approved as the future legal wrapper, we are updating our initial proposal to be more relevant for this particular scenario. So, please disregard our previous proposals and comms in part of financials; our initial proposal in the forum post of August 31 will be updated as well.
Proposal to Abracadabra DAO:
(1) Option 2A (Structuring). We will (i) design the legal wrapper, including corporate procedures and DAO connection, and (ii) incorporate the wrapper as a Swiss association. Price: (a) $17,500 for setup and 1st year maintenance; (b) approx. $14,000 for maintenance starting from the second year. No token allocation. Note: Option A can be selected independently of Option B.
(2) Option 2B (Management). In addition to our Structuring Offer, DAObox will take management positions at the association (director’s, etc.) and will completely manage and administer the wrapper during a 2-year term. Price: (a) $5,000 per month, and (b) a one-time token allocation of 0.15% of the TTS, subject to customary vesting. Note: Services in Option B can be provided only together with Option A, therefore, if Option B is selected by the DAO, Option A will be deemed to be selected as well.
Terms relating to payments and allocations can be found in our initial proposal on this forum above.
We kindly ask the Abracadabra DAO to consider this proposal to be our final offer to the DAO, and update the governance proposal on Snapshot to reflect the changes.
Cheers!