The Cayman Islands Foundation solves some of the more knotty problems associated with DAOs. Ushered into being through the Cayman Islands Foundation Companies Act 2017, these entities merge elements of traditional corporate law with civil law thinking around foundations. Originally designed with the needs of wealthy private clients in mind, the structure is now booming due to its suitability as a tool for giving legal effect to DAOs constitutions and governance mechanisms.

For many of our clients, the Cayman Foundation is a central feature of their DAO entity stack approach. 

Benefits of the Cayman Islands Foundation

• Legal personality: In and of themselves, DAOs cannot have legal personalities. Corporate entities, however, can. The Cayman Islands Foundation has legal personality and therefore can be used as a contracting body for off-chain legal transactions.

• Limited liability: After incorporation, Foundations can decide to become memberless, meaning that it has no owners. As it has no owners, these non-existent owners cannot be made liable for the issues of the DAO. 

• Constitutional Flexibility: Cayman Islands Foundations are highly flexible. The memorandum and articles of association can include a wide variety of governance structures; they can even be written to explicitly mirror the governance structures of DAOs themselves, with provision for voting rights. DAO constitutions are very varied, and the flexibility of the Cayman Foundation is very useful in reflecting this.

• Tokenholders as beneficiaries: Foundation constitutions can be written such that the beneficiaries of the Foundation are the people who own the DAOs tokens. This can be used to accord them governance rights and other benefits as preferred. 

• Reputation: The Cayman Foundation is increasingly seen as an industry ‘gold standard’ for structuring DAOs and protocols. Meanwhile, Cayman has a high reputation among lawyers and planners 

Weaknesses of the Cayman Islands Foundation

• Arms-length: Unlike some DAO vehicles such as the Wyoming LLC, MIDAO, or ADGM DLT Foundation, tokenholders are held at arm’s length to the legal vehicle itself. Their wishes are given real-world effect by human directors, who execute the requests of the on-chain DAO. Human directors, however, are human; some projects may fear this introduces human failings into their system. Others may worry that the directors may refuse to carry out the instructions of the DAO. Other projects again may worry that having directors separate to the DAO itself simply represents unacceptable levels of centralisation

• No specialised DAO legislation: The use of Cayman Foundations in DAO structuring was an unexpected evolution of the Cayman foundation structure. Though a highly flexible legal vehicle, it was not originally developed with web3 use cases in mind - unlike those in say ADGM or RAK. Some may worry that this imposes a longer term uncertainty over the use of Cayman foundations for DAOs.

Setting up a Cayman Memberless Foundation

Decisions project leads must consider: There are many different things to consider. Two important ones are:

• DAO consensus mechanisms: It is of the essence of DAOs that they are decentralied, and that they can potentially offer radical opportunities to re-imagine the shape of human organisations. In doing so they pose all sorts of classic questions of governance and control. Who gets to vote, on what can they vote, how often do they vote, and why? Without adequate thought on these questions DAOs can doom themselves to inefficiency and gridlock.
• How decentralised you want to be: Choosing how decentralised you want to make the DAO project will have big implications for its operational development, growth, and potential regulatory exposure. Various governance, development, and infrastructure decisions will contribute to the extent to which the DAO is more or less ‘decentralized’, ranging from where dev teams and project contributors are based through to the specifics of how and by whom DAO code is written, shipped, and overseen.
• DAO operations: who do you want to carry out the operations of the DAO Foundation, such as distributing DAO grants
• Where you are based: Project leads should always consider how their residency, and that of other major project contributors, may contribute to their personal tax position
• Where your token holders will be based: Depending on the nature of your project, there may be more or or less scrutiny from major regulators. You should consider what geographies your project will be marketed in, and review the potential regulatory matters that might arise as a result
• Whether you intend on deriving financial value from this: The nature of the project and token will affect the chance that it may fall within securities regulations within the jurisdictions that it is marketed / where its token holders live. Projects with a US connection, for instance, may find themselves subjecte to the  well-known Howey test utilized by the US SEC. In order to be compliant, project leads must therefore consider measures to make their project as decentralized as possible, and either remove - or very carefully engineer - any personal returns they may get from the success of the token.

Compliance: Foundation companies don’t need to keep registers of beneficiaries. This is a big boost for enabling the liquid trading of DAO tokens, which can thus be bought and sold without triggering a need to register the new beneficiaries of the Foundation.

Staff you need

• Directors: Each foundation must have at least one director. These directors must act in accordance with the memorandum, articles of association, and byelaws of the Foundation
• Supervisors: When a Foundation becomes memberless, it is required to have one or more Supervisors to enforce the rules of the Foundation. These have wide ranging powers of oversight and enforcement, but do not have ownership or economic entitlement over the Foundation. More broadly, they are useful in that they oversee the work of the Directors, and can remove them if necessary.

Within the Stack: Cayman Foundations in context

Cayman Foundations are typically used to give real-world effect to DAO constitutions and governance decisions. Clients typically use them alongside other entities in order to achieve legally worthwhile results. 

Token issuance vehicles: Many clients will set up an entity in a low-cost crypto friendly jurisdiction such as the BVI to create and issue the DAO token. After a period of time this entity is dissolved. The Cayman Foundation, meanwhile, will be bound under the terms of its constitution to act according to the wishes / in the best interests of the tokenholders.

Operational companies: While the Cayman Foundation gives the DAO legal personality, limited liability, and a means of expressing itself in the ‘real’ legal world, the actual business of acting off-chain is typically carried out by one or more operational companies. These will be in various different jurisdictions, depending on the needs of the DAO and its participants. However, many projects elect to use BVI entities for their operational purposes.

Other Foundations: Some structures may even use other Foundations for the purposes of token issuance