Operating a DAO with a Corporation as the Legal Wrapper
wait, isn't a corporation the antithesis of a DAO?!
Since the fall of 2022, we've been planning and, from 2023, actively developing PlanetDAO, which is set to launch in early May.
Over the past year, we've deliberated on which legal wrapper would be best for forming a DAO. We've been greatly assisted by attorneys Tonomura-sensei and Koizumi-sensei from the Nagashima, Ohno & Tsunematsu law firm, who have experience in setting up LLC-type DAOs in Japan.
Currently, many DAOs are beginning to adopt the LLC structure as their legal wrapper, but we have chosen a different corporate entity. Here, I will share the background and reasons for our choice.
For an overview of LLC-type DAOs, please refer to Kanemitsu-san’s notes on the topic (although its in Japanese, thank you for consistently making complex information easily understandable).
https://note.com/midolix/n/n672d580af22f
Disclaimer:
Legal Advice: The information in this text is not legal advice. If you need specific legal advice, please consult a law firm.
Financial Advice: This article does not recommend investments. Investment decisions should be made based on your own judgment and responsibility.
Business Overview and Goals
Our project will transform historic buildings in Japan into lodging facilities.
We will raise funds from individual investors both domestically and internationally through small investments. Investors will receive dividends from the properties.
Since we deal with historically significant buildings that require preservation and ongoing use, not only investors and our management company but also local residents and experts (such as architects specializing in historic buildings and environmental preservation groups) will participate in decision-making and discussions.
It is said that there are currently 8 million vacant homes and buildings in Japan, of which 1 million are historic buildings. This issue is expected to worsen with the decreasing population.
Although the government has protected cultural properties and townscapes with grants, maintaining and preserving these through limited public funds has become challenging. Donations and volunteering have their limits; to sustain these cultural assets across generations, gathering funds and managing operations are essential. Hence, creating a new business to generate profits is crucial.
The role of PlanetDAO is to gather members to innovate new businesses focused on the preservation and utilization of historic buildings, transforming the passive nature of these structures.
What is a DAO to us?
While various definitions of a DAO exist, our definition at PlanetDAO is:
A treasury that grows the money invested by everyone.
Produces consistent outcomes through actions (smart contracts).
Operated by a diverse group transcending nationality, profession, gender, and age.
Choosing a Corporate Form for DAO
As you might be aware, in theory, DAOs, being collections of individuals with smart contracts and treasuries, do not require a legal personality.
However, to avoid the risk of unlimited personal liability in case of business failure and because real estate requires a registered entity or person, we had to choose a legal form for our DAO. After various discussions and considerations, including LLCs and cooperatives, we opted for a corporation.
Our business has two essential requirements:
To provide investors returns greater than their contributions (income gain from operating the accommodations).
To reflect the intentions of the local residents (we can manage properties like historical buildings because local opinions are incorporated).
Specifically, under current Japanese law (and likely similar elsewhere), legally achieving this is only possible with a corporation. The properties are owned by the corporation, investors contribute by purchasing shares, and they become shareholders of that company. Profits from these properties are distributed as dividends to shareholders.
In the recently introduced LLC-type DAOs, when attempting to implement returns for investors,
dividends beyond the contributed amount can only be paid to “executive members”.
These “executive members” must register their names and addresses, and changes to this registration incur a fee of 30,000 yen (250 USD), making it not something easily altered.
The transfer of “executive members” rights can only occur between “executive members”, and only they can perform solicitations.
Conversely, in a corporation:
There is no cap on the dividends paid to shareholders.
Shares can freely undergo secondary trading.
Registration is not required for managing shareholders; internal management suffices.
Just a note that although the Japan DAO Association's presentations focus on the fundraising capabilities enabled by Japan’s LLC-type DAOs, from a fundraising perspective, corporations offer better conditions. I personally believe there are other areas where LLC-type DAOs excel and would like to hear thier thoughts on this.
The Inconveniences of Corporations
Corporations are suited for raising funds and distributing profits, but there are several inconveniences in operating a DAO according to corporate law.
Necessity of an Annual Shareholders' Meeting
Given that shares are issued, an annual shareholders' meeting is required. We conduct these meetings online and strive to clearly distinguish the voting items at the shareholders' meeting from other voting tools to minimize the burden.
Mandatory Small Contributions and Dividends
In token design, only governance tokens are issued, and airdrops are possible. However, with shares, a minimum investment of 1 yen is necessary, and shares without dividends cannot be issued. There must be a cap on dividends (for example, up to 2 yen).
Centralized Control Due to the Presence of a CEO
One of our biggest concerns in choosing a corporation as our legal wrapper was whether to adopt a centralized control that contradicts the philosophy of DAOs.
We have carefully designed this aspect to nullify the influence of the CEO, minimizing decision-making by the CEO and board of directors alone during business operations, and aligning the design with the principles of DAOs.
For instance, I initially start as the founder and CEO, owning 100% of the shares. However, as shareholders accumulate, all my shares will be cancelled, leaving me as CEO in name only without any financial returns or voting rights.
Furthermore, all decision-making methods and operational details are specified in the articles of incorporation or company rules, and cannot be altered solely by the CEO or board of directors. Changes require shareholder approval. Additionally, we plan to record these articles of incorporation or company rules on the blockchain, making it transparent who made changes and when. (We are currently seeking someone to implement this!)
By default, the management of the properties will be outsourced to our startup member-owned corporation, PlanetLabs, but if another company demonstrates better performance, it can be elected as the new management company through voting.
Thus, while a CEO is necessary, we have designed it such that they lend their name only, and no substantial decision-making or operational execution occurs through them.
In Conclusion
Our original plan was to record ownership on the blockchain, enable contributions and dividends, and facilitate secondary trading. However, we were unable to implement this due to the limitations imposed by Japanese law on investment DAOs.
Nonetheless, as feedback from agile legal cases shapes LLC-type DAOs, we expect them to evolve with future legal amendments. As someone who continues to challenge DAO operations, I am eager to contribute further.
Lastly, we would appreciate your support for PlanetDAO!