With the passage of RIP-000-018: Ren 2.0 funding and Ren Foundation, the DAO has voted to establish a Ren Foundation and mint new REN tokens to it to help fund Ren 2.0 development and ecosystem growth. After consulting legal counsel in the U.S., Cayman Islands, Panama, and Central Europe, the community has ample information to vote on a legal structure for the Foundation to best achieve its mandate. A working group was formed to present findings and request a budget to incorporate whichever structure is voted on.
For background on the merits of establishing a Ren Foundation and funding the transition to Ren 2.0:
- RFC-000-037: Incentives for a decentralized network
- RFC-000-046: Transitioning to Ren 2.0
- RIP-000-018: Ren 2.0 funding and Ren Foundation
- Support and advance all aspects of current and future implementations of Ren;
- Issue, hold, and spend digital assets;
- Provide funding to research, development, and growth initiatives;
- Administer trademarks, copyrights, software licenses, and other intellectual property
- Educate the public on Ren’s technology, protocol design, and ecosystem;
- Facilitate a robust governance apparatus;
A number of legal structures were explored throughout community discussions. However, with an immediate mandate to implement RIP-000-018, the findings below focus on legal structures that are most fit for issuing a new REN token and funding development of Ren 2.0. The structures below have tradeoffs that make them more or less suitable for different purposes, so the findings do not make any recommendations for or against specific structures for any purpose outside of RIP-000-018.
One of the more heavily-discussed structures in the community has been dYdX’s framework for Guernsey purpose trusts. The purpose trust is a private agreement between trustees and an enforcer that serves as a watchdog. By delegating actions to trustees, who can engage in the same off-chain activities as any other entity with limited liability, the DAO alleviates itself from taking actions that could result in liability for its members. As a private agreement that does not require government approval, its defining characteristic is censorship-resistance and protection from administrative dissolution, which allows DAOs to continue operating as DAOs while being more effective in the off-chain world.
For more on the dYdX framework, refer to Legal Framework for Non-U.S. Trusts in Decentralized Autonomous Organizations.
The Foreign Foundation entity structure is the most common structure currently in use by network and protocol DAOs (most commonly structured as a Cayman Islands HoldCo, with the inclusion of a B.V.I. OpCo (depending on activity and VASP reporting requirements)). These structures were first utilized as non-profit vehicles to oversee the future development of blockchain networks (e.g., the Ethereum Foundation), but are now more commonly used to provide an “ownerless” legal entity structure for DAOs in which the fiduciary obligation of the entity is to the purpose specified in the formation documents rather than to shareholders.
The Foreign Foundation solves the three biggest challenges facing Entityless DAOs: (i) lack of legal existence (inability to contract or own property); (ii) inability to pay taxes; and (iii) potential unlimited liability. (source: A Legal Framework for Decentralized Autonomous Organizations, Part II: Entity Selection Framework, p. 27)
Cayman foundations are legal entities formed under the Foundation Companies Act, 2017 of the Cayman Islands. Management rests with the board of directors, which is supervised by a board of supervisors that has voting rights in the foundation. There are three main roles:
- Founder: The founder may or may not have any right/obligation towards the foundation as determined in the Articles of Association. This is an optional role.
- Directors (Board of Directors): The foundation must appoint and have at least one director at all times. Directors manage the affairs of the foundation, similar to directors in a company limited by shares.
- Supervisors (Supervisory Board): The foundation may or may not have a supervisory board. Supervisors oversee directors, and their powers, rights, and obligations are set in the Articles of the foundation company. A foundation must have at least one member or supervisor at all times.
A Panamanian foundation is an offshore private foundation with legal personality and no owners or shareholders. There are three main roles:
- Founder: The founder does not need to have influence over the control of the foundation, but certain rights may be reserved to the founder, if needed.
- Foundation Council: Similar to a board of directors, a foundation requires three council members: President, Secretary, and Treasurer. If the council member is a legal entity, a sole council member is sufficient. It is common to engage three nominee directors in order to meet the statutory requirement of three council members OR appoint one corporate council member to keep the controlling persons private.
- Protector: One who ultimately controls the foundation and all its assets and is appointed by the foundation council. Once appointed, the protector has the power to remove or replace the council members at his or her own discretion. The foundation may decide to not use a protector. Nominees are available.
Our first consideration is whether RIP-000-018 would be best implemented with a Guernsey purpose trust under the dYdX framework or a foreign foundation. We learned that token issuance is regulated by and must be assessed according to the laws of the country of issuance, and that it’s important for the token issuing entity to be in a crypto-friendly jurisdiction. Foreign foundations commonly domicile in jurisdictions whose VASP regimes do not apply to them and operate through subsidiary companies in jurisdictions whose VASP regimes do not regulate token issuance, like BVI. While Guernsey purpose trusts are compelling for subDAOs, there is little to no precedent within the DeFi space for their operating through a token-issuing subsidiary, and they may generally be less recognized for having legal personality. As a result, we propose following industry precedent and using a foreign foundation in the interests of risk aversion.
Our second consideration is where the foreign foundation would be domiciled. Although the language in RIP-000-018 specifically alludes to Switzerland, Swiss foundations can take up to 6 months to set up. The lawyers that were consulted were unanimous in their views that the legal benefits of Switzerland do not justify the wait or cost ($100k+ USD), especially considering the Ren community’s sense of urgency.
Thus, the two most favorable jurisdictions for a foreign foundation are Cayman and Panama. The Cayman foundation is the most common model used by DAOs, although a few DAOs like Sushi have recently chosen Panamanian foundations (in addition to a separate Cayman foundation, in Sushi’s case). While both jurisdictions would suffice and could be set up within one or two weeks, we generally favor Cayman for a few reasons. First, there is legal certainty in Cayman. It has already adopted a law concerning cryptocurrencies and VASPs, while Panama’s latest bill — as crypto-friendly as it may be — has yet to pass and includes amendments that might be harmful and lack technical understanding. Second, Cayman has enjoyed historical geopolitical stability, which could mean more predictable and consistent legal and regulatory frameworks in the years ahead. Third, concerns have been voiced about limited payment rails in and out of Panama. As one example, the Circle API supports payments using cards issued in Cayman but not Panama. Fourth, Cayman is the recommended jurisdiction for foreign foundations in Marc Boiron’s Sufficient Decentralization: A Playbook for web3 Builders and Lawyers, presumably for some of the reasons above. And fifth, we have a highly regarded Cayman lawyer who has been thorough in his consultation and can assist the working group and Foundation on all upcoming legal matters, including the planning and structuring of Cayman and BVI entities, preparing of development agreements and token materials that we expect to need in the coming weeks, and more. If a Panamanian foundation were chosen, the working group would need to engage multiple lawyers in and out of Panama, which could add administrative overhead.
While we’ve received high-level price estimates from the lawyers that have been consulted, it would be more productive for us to request a budget that leaves plenty of room for error. This ensures that additional or unexpected work that arises during this process can be financed without the governance overhead of additional budget requests. So, the working group is requesting a budget of $65k USD equivalent to be held in a multisig. All remaining funds could be returned to the Community Fund or sent to the Foundation.
- We will hold a period of open discussion to collect feedback, improvements, and new ideas. However, we propose fast tracking this to a RIP over the next few days if there appears to be sufficient consensus.
- If the community is in favor of the proposal or a modified version of the proposal, we will publish a formal RIP.
- If the potential RIP is approved, the working group will oversee implementation on behalf of the DAO but will not necessarily manage any legal entities that may be created.
- If the potential RIP is approved, the working group will also facilitate informal discussions in Discord for potential incorporation matters.
Some further reading and case studies:
- Sufficient Decentralization: A Playbook for web3 Builders and Lawyers
- A Legal Framework for Decentralized Autonomous Organizations, Part II: Entity Selection Framework
- Recommendation for Sushi Legal structure
- Panamanian Legal Entity Structures for Web3
- [BIP-14] Funding Proposal for the Balancer Foundation
- Legal Framework for Non-U.S. Trusts in Decentralized Autonomous Organizations