[Discussion writeup] The Legal Roadmap for Teia - Next steps

info for context

This writeup is trying to sum up the current state of the discussion in the #:balance_scale:legal channel of the Teia Discord.

The focus of the discussion is to determine a pathway for Teia on how to 1. use the new marketplace contract as soon as possible and the legal implications of that and 2. work towards incorporation as a DAO

this doc is gathering the info we have from the US lawyer Alex Liu froom tezos commons and discussion input from philip shlisllokh (lawyer, CZ), @Sutan (lawyer, spain) ikki (law student, brazil) and other participants in the discussion.

Feel free to give your input here in the forum or on discord, this document will be updated over time with new info. I will try to update this writeup with new info/opinions coming in.

our current situation

currently we are not collecting any fees and we use hicetnuncs smartcontracts. In terms of the dApp we are still using “hicetnunc” - with the implementation of the new marketplace and multisig smart contract, this is going to change.
the contracts are ready and audited, it is basically a matter of pressing a button and we can start using our new smartcontract.

We also have a multisig setup with currently 13 people as managers of the contract. the new marketplace contract will direct all fees there and we will use the multisig to manage all finances according to budgets agreed upon by the community. the amount of fees gan be adjusted via multisig vote. The next locical step is switching the marketplace contract on, but this step comes with legal implications as we are then starting to act as a legal entity (s.below)

The long term plan going forward is to additionally form a DAO; Currently we don’t use DAO tokens for voting - at the moment all wallets that have interacted with the hicetnunc smartcontracts can vote on our teia Vote tool. There is however the option to add hDAO (issued by hicetnunc) to the vote weight. For now we don’t have a real DAO model in place but we are working on a first DAO voting model and can now start adjusting the proposed DAO models according to the diverse legal advice we got/are getting.

Table of Content:

1. Using the Teia marketplace contract as an unregistered Entity
2. General advice/info on incorporation
3. Incorporating as a DAO on the Marshall Islands
4. Possible Legal Roadmap for Teia

For the near future: The option of using the new contract unregistered until we incorporate as a DAO

According to Alex it seems to be a viable option to turn on the smart contract and collect fees without being incorporated in order to start collecting fees and paying bills and raising capital for future registration. There are multiple reasons why having a legal entity would be best for us, but we do not necessarily need it right away. However, it is not advised to go unregistered as a final solution.

Legal liability for individuals

As long as we are not incorporated but act as an entity (i.e. providing a dApp, collecting fees) everyone contributing to the project can technically be held legally responsible for teias actions (or inactions).

People at the forefront of the community, such as Domain owners, Multisig signers, Discord admins, developers are more responsible than others. The general rule for us acting without incorporation is that the more people we have as contributors the smaller the risk for each person gets.

The Question of legal liability of the individual participants comes down to weighing expected risks: If someone wants to sue teia, they will have to make their case and find someone from within the community to hold accountable, and pay the costs of going after them legally.

Incorporating will add a legal wrapper/shield to the individuals - instead of single people, the corporation “teia” would get sued and held responsible. thats why in the long run (esp. if teia gets bigger) incorporation is advised.

Alex and others pointed out however that there seems to be a specially high risk for citizens of the US and poetntially EU, as there are stronger regulations in place (i.e. Tax) that might proof problematic for US/EU people that participate at the forefront of Teia without it being incorporated. We need to get more detailed info on that and might want to debate wether US/EU citizens want to step down from the multisig for that reason if they dont feel comfortable with that.

Most lawyers we spoke to concluded that the risk of getting sues at this stage of the project is reasonably low. There is a risk but it seems to be small enough to just go for using the smart contract.

Risks for unregistered Teia

  • it might be hard to do business with other companies as an unregistered entity because unregistred businesses are not very trustworthy to other companies. (no responsible entity to hold accountable, only a loose bunch of individuals). For now we dont plan to do business with many companies.
  • as long as we are not an legal entity we cant register our name/IP as trademark
  • since there is no legal entity, everything relies on trust for the people of the multisig and others at the forefront of the project: It is hard to control the individual actions and hold people accountable (but we already set the multisig up with that in mind and the way it is set up is trying to prevent individuals from causing harm bc multisig action needs voting etc)
  • after registration as a DAO (see below) we could dissolve the multisig and make the DAO the admin of it.

Tax considerations for going unregistered

  • People that get money from the multisig contract need to pay individual taxes. but paying out contributors from the multisig before registration is not planned at this stage (Registration, e.g. as a non-profit organisation would open up other mechanisms for us, e.g. the possibility of hiring people or putting expenses against income.)
  • Sutan argues: the fact that we dont “pay out” gains can be used as an argument that we are acting as a non-profit org, even while being unregistered: Collecting fees is not what makes you profit/nonprofit, is sharing it between “members” which does. - borsss has a different opinion on that: Generally speaking, if the multisig’s expenses are less than its revenues within a financial year, it’s made a profit/surplus. This is usually taxable (aka corporation tax), and OECD countries are aiming for a minimum corp tax of 15% by 2023. Also, depending on the jurisdiction, only certain expenses are allowable to offset revenue, so you’ll need to consider record-keeping to justify all expenses. Consideration should be made for accounting purposes (one for the budget/finance group?) about which date is to be considered as the start date for “trading”, after which you need to ensure that you spend all the expenses within each financial year if you want to go for a non-profit status. Some jurisdictions allow registered non-profits to accumulate & roll-over any surplus to subsequent financial years for future investment. If the multisig does make a profit and doesn’t go for non-profit registration, it should consider keeping 15-25% from the profit as reserves against any potential tax demands.
  • we could set the fees to 0% to avoid any future tax liabilitiesfor TEIA (needs to be clearified if we need to report past transactions of the wallet upon registration)
  • philip added: if we make it clear we are raising fees in order to register instead just for paying upkeep costs, this could be legally beneficial for us as it would show that we are not running the contract for profit/personal gain

summary/suggestion for next steps

In the discord the current consensus between the legal team and multissig signers seems to be that activating the teia marketplace contract now with 0% fees would be the best option for the next step. that we way we avoid any tax liabilities and can safely keep the “non profit” argument. The multisig holders need to determine if they are fine with this action and if they are happy with the legal implications of that. For that a discord vote was suggested.

It is important to note that having 0% marketplace fees can only be a temporal solution as it is not sustainable (we need to pay our bills) and can be considered an unfair competition practice for other tezos art platforms that need to charge fees in order to keep functioning. currently our bills get paid by third parties that want to help us buy some time to sort the situation out. it would not be fair to them if we just keep on taking their help without working towards being able to self-sustain teia financially. it was suggested to use the 0% marketplace fee for 1-2 month while ironing out the last questions. as mentioned above, the platform fee can be changed by a simple vote in the multisig. We should set up a community vote on possible marketplace fees and incorporation models.

user borss summarized: I think you can start collecting, as long as you start your accounting from that date, and realise that you’ve unlimited liability without the protection of a legal entity wrapper to limit that liability. I’d guess that the risks could be seen as relatively low whilst revenues are low, tax people don’t generally come after you for at least 12-18 months. Hopefully no lawsuits either, eg from disgruntled developers!

Worth pointing out, that hicetnunc operated as an unincorporated sole trader without (as far as we know) registering that business in Brazil once revenue went over the relevant R$ trading threshold.

I strongly recommend you keep strict records of all fiat spending (& reimbursements to individuals making those payments on behalf of the multisig), and records of all crypto payments & reasons. This will help any accountant or lawyer regularise your situation should the multisig transition to a registered legal entity, will help for any future tax calculations, and it’s important for the community to have full transparency.

Registration before DAO?

The process of setting and incorporating a proper DAO will probably take a long time. We will need to collect money before that in order to pay our bills. We could collect fees without being incorporated, but as mentioned abovem that comes with risks and uncertainties, we would also need to keep a very detailed record of our gains and expenses as we would need to pay taxes upon registration probably.

Looking at the tax and legal issues (eg for US citizens) it might be worthwhile to register as a company to have legal and tax clarity before collecting any fees. The process of setting up a offshore company is not very complicated and can be done rather quickly. The idea here would be to have a legal warpper/safety for the individuals while we form the DAO and invcorporate it properly.

The big advantage is we would be legally safe and wouldn’t need to pay taxes.

If we go with the Republic of Marshall Islands DAO registration we could do this rather organically (see below)

Advice for the incorporation

In general the main Problem of incorporating is that for most models a number of people would need to register Teia under their official name (KYC) and be responsible for the project and also the official “owners” which goes against our vision of community ownership. The exception are a few DAO models for registration in a few select countries

Profit vs non profit

Registering as non non profit would have several pros for us: less tax liabilities, far less legal complexity and costs.

According to Alex (at least for the US) for a DAO the question is if we promise/pay/distribute any profits to Token holders, which would put us in a “profit” category that would also require us to do stuff like KYC and come with huge legal costs and responsibilities

If we want to stay non profit, we could argue that we are an organisation to foster culture and arts.

We wouldn’t be able to tie any profit distribution to our DAO token if we want to be non profit we need to make it clear that no profits are shared directly to holders and we don’t promise any future shared profits-

So the DAO tokens would be usable solely for governance purposes- not for profit sharing. We can of course still pay contributors and generate income to a certain extend. at least for US non profit would also mean we cant sell our DAO tokens for money directly (?) Barcley adds, that The definition of what non-profit is in most countries is based on the fact that partners may not collect profit from the company, but even a non-profit company can make money on its operations (typically donations). It is about the flow of money from the company to the partners, not from third parties or partners to the company, so selling Tokens to raise money might be an option

Therefore clear advice from Alex:

  • Give tokens out free without asking for money.
  • Tie tokens to governance only. No profits implied, promised or given.

Further considerations for the DAO Token distribution

The issue with tokens in my understanding was not about being for profit vs. nonprofit but that tokens that are issued for fundraising, in sales or carry speculative value / profits are treated like IPOs / financial instruments - at least in the US/EU. That would imply having to register as a financial institution that is allowed to issue those instruments or risk being prosecuted / shut down:

Registering a DAO in the Marshall Islands (RMI)

There is a very interesting new possibility to incorporate as official DAO in the marshall Islands. The special pro is that Token holders on the blockchain are acknowledged as shareholders without KYC. one person would need to do KYC but would not be responsible officially and also not “the owner” of the DAO. We would need to be a non-profit (open question: do we fit the non profit profile for RMI, too?)

further info:
https://www.globenewswire.com/news-release/2022/02/15/2385589/0/en/The-Republic-of-the-Marshall-Islands-Formally-Recognizes-DAO-Incorporation.html

We had our first call with MiDAO who offered to help with incorporating DAOs on the Marshall Islands (RMI). Here is a summary of what infos we have so far on that process, more info will follow. We will be able to set up another call to talk about further questions and next steps.

Requirements for the DAO Model

The DAO needs to be a non profit LLC, therefore it would have technically no owners and would operate without the intention of profit.

  • We would not be required to pay taxes in the RMI and we wouldn’t need to provide financial reports to the RMI. local/individual tax requirements still apply (i.e. employment taxes etc)
  • we don’t need to report membership (exception: see “KYC” below)
  • As a non profit, we can’t distribute any gains among the DAO Tokenholders for just holding the Token. (see Alex call) We also need to stay under a certain surplus of Gains vs money spend.
  • Of course we can pay people for services and pay bills or even employ people.
  • It still seems to be possible to sell DAO tokens via exchanges as long as it is clear it is not used to distribute Gains - only for governance.

The way we set up our DAO is very flexible: We can define our DAO by pointing to a smart contract that shows how governance of our DAO works, we can have a group of people that have the governing power, we can have a written contract/whitepaper that defines the Governance, we can distribute Tokens, we can use wallets to vote, voting weights, all that is up to us.

What we need is to keep an operating agreement that explains who is in charge of the DAO (members). The members of the LOC/DAO can be defined by us: it can be all token holders, it can be a group of people, it can be defined on paper or by a smart contract, it can be wallets.

The agreement needs to be kept updated and once a year we need to submit the current agreement to the RMI via MiDAO

We can change the agreement over time. It is for example possible to register Teia with a few people as a more classical LLC while we are still working on defining our DAO model. This would give us the opportunity to collect fees before we agreed on stuff like Tokenomics and voting weight or while we are waiting for technical implementation.

We could also use a smart contract like our multisig for the first phase of our DAO and keep on building the DAO model while being already registered.

The process of registration

The process of registering the DAO on the RMI can be done fully online.

We would need:

  • at least one person do the registration with KYC as a LLC
  • an initial operation agreement

costs (taken from MiDAOs general offer, not fully negotiated)

  • to pay the registration fee of 3 ETH initially and $3k/year for the registered agent service (starting after 1 year)
  • to provide a 1 ETH refundable deposit for the reservation, then within 2-3 weeks you will have your LLC.

KYC for members

(KYC = Know your customers, the need to provide full name and address for registration/a service). We need to do KYC if certain conditions are met:

  1. the person(s) that register the DAO initially have to do KYC, but wouldn’t retain any special position of power or responsibility over the DAO/LLC.
  2. Everyone that holds 10%+ of the total DAO token needs to provide a KYC. The names will be checked against the blacklist of the US so the RMI can conform with international banking law. - if someone would refuse to KYC while holding more than 10% tokens we would need to remove their wallet from governance. Sanctions Programs and Country Information | U.S. Department of the Treasury - an idea for the DAo contract would to make transactions fail that would add more tokens to a wallet after a ceratin threashold like 10% of supply

Other Options

the more “classical” ways to register

another option is to register in a more classical way. i.e. as a company in a cryptofriendly country, as a Limited liability LLC, LOC or as a Cooperative.

But this would mean we would have a list of people responsible/liable, they need to provide their personal info for registration and they could dissolve/own TEIA if they want to.

the pro of that would be we could get that pretty easily. but it would also mean that the whole DAO would still be dependend on individuals and centralised company owners that are in charge.

DAO Models in the US

a place to look is Wyoming / Vermont - LLC DAO, so far the legal team was pretty much at one that a registration in US would not be very desirable for us as Teia given that very few members are from there and it comes with a lot of legal costs and liabilities. Also the DAO models currently available in us would require KYC.

Looking at the current geopolitical situation and the heavy sanction practices put in place US government further adds the risk of us needing to comply with geoblocking rules from the US if we incorporate there, which is probably not desired by the community (s. core values).


Possible legal roadmap for the Teia community

  1. Put the marketplace contract live at 0% in order to be able to promote swapping on that contract without legal risks for a very limited time (a few weeks) - for the time of not collecting fees, we can try to cover the indexer and Infra costs by promoting Manitcor/Integrolabs donation wallet

  2. Raising Funds for incorporation on the RMI as a DAO (maybe through donations or through putting a marketplace fee in place for a limited time before incorporating and deciding on wether the RMI DAO incorporation is the right way to go for us.

  3. Incorporating as a DAO asap with a very simple, initial governance model (eg a big multisig with the most active contributors (11-60) as members to vote on decisions) while working on finishing our first real DAO model (smart contract and DAO token for that is currently being developed)

  4. As soon as we are finished with the DAO token and smart contract we can switch to that as our governance model, fin!

3 Likes

Regarding registering a DAO in the Marshall Islands (RMI) I’m very pleased to see this proposal, not only because of the lack of KYC but also because the non-profit model encourages us to decouple governance from the speculative aspect of economic tokens.

My only suggestion at this stage would be to encourage MiDAO to accept fees in $XTZ as I’m sure their services would be interesting for other Tezos based platforms/DAOs.

follow up: on the last call MiDAO told us they would accept crypto payment in Tezos!

2 Likes

@MerchantCoppola that’s excellent news!