[GIP-34] Setting Up a Legal Structure for the GEAR DAO

Hi everyone,

It’s Sergey from AURUM Law Firm (https://aurum.expert). You might already know us as we performed the DD/KYC check on the token sale participants for the GEAR DAO a few weeks ago ([GIP-18] DAO Round PART 2. Community Proposal - #52 by Sergey_aurumlf). Now we have another proposal for GEAR DAO to consider.

Background

We’ve been in crypto for years now and some may call us “crypto lawyers”, although we consider this definition to be not quite correct. Nevertheless, we know the market and industry quite well and frequently act not only as lawyers but as advisors as well.

While working with DeFi projects and DAOs we noticed that many organisations have certain structuring issues: at a certain point, every DAO inevitably faces the need to have a legal structure, for example, to enter into contracts, manage IP and assets, hire developers and contributors, make fiat payments, etc. Yet, often core contributors and multisig controllers wish to stay out of any legal arrangements, remain anonymous, or avoid legal exposure, which results in a situation where there is no one who could take the lead in the creation and management of such legal structure.

Lately, we have been working on a new project that is called DAObox (https://daobox.io/). The idea of DAObox is simple: we set up and manage a legal structure for the DAO; this structure is fully subordinated to the DAO but does not require anyone from the DAO members or multisig controllers to be revealed or exposed.

The legal structure that I mention is often called a “legal wrapper” (in this post I also call it “legal entity” and “legal vehicle”). Below I will provide more insight into how everything works and why GEAR DAO might need this.

Rationale

A legal wrapper is essentially a legal entity with its own legal identity and personality. Think of the legal wrapper as a company that can acquire its own rights and obligations and has a separate balance sheet.

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 and subscriptions, giving grants, and concluding agreements. Such an entity can be further used to hold and manage off-chain assets, such as fiat funds, IP, trademarks, domain names, etc. 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).

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 vehicle will be to facilitate the development of the GEAR Protocol regardless of who is “in charge” of the protocol. 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 GEAR protocol as long as it has resources.

DAO vs Legal Wrapper

Legally speaking, a legal wrapper is not the same as a DAO, so it does not replace or absorb a decentralised autonomous organisation that exists on the blockchain.

This means that the GEAR DAO will continue to operate on-chain, and the legal wrapper will only take charge of operations that are occurring off the blockchain. This also means that the DAO and multisig wallet controllers retain direct control over smart contracts, the treasury, and any on-chain assets that the DAO has, and finance the legal wrapper only as and when needed.

Control

The issue of control is an important one as in the future, the legal wrapper may be holding and managing certain valuable assets of the GEAR DAO (if DAO ever decides to transfer those to the legal vehicle). In short, although DAObox will be taking the managerial positions, the GEAR 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 of the entity will subordinate its governing bodies and management to the GEAR DAO and resolutions adopted by on-chain voting. Any such resolutions will be binding upon the legal entity and its managers.

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 certain transactions (the value of which exceeds a certain threshold), and performing certain other actions – any such acts will require the consent of a DAO.

Lastly, given that the legal wrapper will be subordinated to the GEAR DAO, the DAO can pass a resolution on replacing us as managers of the legal entity at any time, and such resolution shall be binding.

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 (maybe) have AMA sessions every month or two if that would be desired.

Our Risks

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 I mentioned above, the very need for such a service is 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 GEAR 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, but the risks still exist and can be quite serious and resource-consuming.

Engagement

With respect to the legal wrapper, we will be acting as hired managers under the supervision and control of the GEAR DAO.

We expect these to be the main areas of our responsibility: setting up and maintaining the legal entity, major corporate actions, accounting and reporting, opening and operating bank accounts, making fiat payments, handling paperwork, including reviewing and executing contracts (excluding legal services), managing accounts with service providers, such as hostings, subscriptions, servers, etc., business correspondence. We will also act as the point of contact for the registered agents. In other words, we will handle all types of activities that are normally carried out by an entity.

We do not feel like our engagement with GEAR 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 allocated to cover the expense.

Note that this offer does not cover any legal services and DAObox will not be acting as a legal advisor.

Proposal

We propose to establish a legal wrapper for the GEAR DAO as an ownerless (i.e., self-owned) foundation. The constitutional documents of the foundation will subordinate its governing bodies and management to the GEAR DAO and resolutions adopted by on-chain voting and will limit our authority on the disposition of material assets and entering into transactions the value of which exceeds USD $30,000 without the consent of the GEAR DAO. Normally, any spending of funds will be in accordance with the quarterly/semi-annual/annual plans (budget) adopted by the GEAR DAO.

We will take the managerial positions, including the position of supervisor and director, i.e., will essentially be hired managers of the entity. The foundation will have no members.

We offer the following terms:

(a) A two-year contract (can be extended thereafter);
(b) 40,000 USDC as an annual fee (80k for the 1st and 2nd year payable upfront);
(c) A one-time GEAR token allocation: 0.1% of the total GEAR token supply, to be distributed in accordance with the schedule applicable to the current GEAR sale round (1-year lock-up starting September 2022 with 1-year vesting thereafter).

Procedure

If this proposal passes, the GEAR DAO will need to allocate 80,000 USDC (1st and 2nd-year fees) to the following ERC20 wallet: 0x95e7Fb8aecca90DF207379419DE8144836BBC549.

The token allocation can be granted upon the completion of the entity set-up (via a distribution smart contract or otherwise) to the following ERC20 wallet: 0xd19841D452ea34428B549fe1Ec39da57d863dFba.

The fee for each subsequent year will become due 30 days before the anniversary of the day when the GEAR DAO will have approved this proposal, so the next payment will become due approx. in September 2024 (if the proposal passes). Certain disbursements, e.g., corporate/agent’s fees, may be added to the annual fee starting from the third year onwards.

Upon the receipt of the initial stablecoin payment, we will proceed with setting up the legal entity and will report to the DAO once everything has been set up. We will further share the entity’s constituent documents with the DAO so that all members can review the control mechanisms and corporate governance rules implemented.

After that, the GEAR DAO can decide on the tasks and objectives of the legal wrapper for the period of October-December 2022 (or another period at the DAO’s discretion) and allocate a budget that will be required for these purposes. The same has to be done periodically (on a quarterly, semi-annual or annual basis) or on an as-needed basis. Adjustments are also acceptable.

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. Approval of this proposal by the GEAR DAO and transfer of the fee to the above wallet will constitute the acceptance of the offer and terms set out in this post. 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.

1 Like

Thanks bosses, love the proposal and really appreciate the effort that has gone in in writing something so elaborate. Have a few questions + thoughts, though.

Not entirely sure if we have enough operational needs at the moment that require operations off-chain through a legal entity. If you could enumerate the instances where you feel the wrapper will actually come into play apart from regulatory action, that’ll be massively helpful.

At the moment, we average about 15 financial transactions per month including contributor compensations, there hasn’t been an issue with the same being carried out on chain till now. My worry is that I don’t really see too many off-chain transactional requirement till we hit 100k+ members or multiple more devs joining in at which point operational assets + agencies become important. Would love other’s input on this

A 0.1% supply is quite high, $200K effectively basis the revised FDV for LM. My suggestion would be to have a structure similar to contributor payout i.e 80k$ worth of $GEAR at 200M$ FDV, monthly division, 3 month lock ups with 9 month vesting

Really appreciate this though

Not entirely sure if we have enough operational needs at the moment that require operations off-chain through a legal entity. If you could enumerate the instances where you feel the wrapper will actually come into play apart from regulatory action, that’ll be massively helpful.

I believe this could be:

  • IP holding for codebase: that is very important to have in the structure that should actually own it and control, because as we see with some “centralized DAO setups” eventually the company that holds it on behalf of the DAO, can just go raise equity and somewhat abuse the DAO trust. It is also important to have it in the DAO structure if there is licensing to occur or other things.
  • Domain rights, control over all media, etc. in case contributors leave and need to delegate to new members, whereas holding it on personal names is a risk (for everyone, operational risk).
  • Signing contracts with auditors as they require an IRL entity often.
  • Some small IRL payments that are otherwise risky to have on names of devs personally

My worry is that I don’t really see too many off-chain transactional requirement

I don’t think we will grow in this number per se, I assume Aurum just meant that it will be provided whenever such a thing occurs, but it’s not the offering here. This is just a comment on transparency.

A 0.1% supply is quite high, $200K effectively basis the revised FDV for LM.

Costs are hard to argue on. Either side can rebut it however they want.

The point here is that we (me and you, personally or on behalf of companies we work on) would benefit from legal protection and a more proper way of real-world things functioning. As such, the question is - what cost do token holders (the deciding body) will tolerate to have its contributors (current and future) feel safe to do things in the ecosystem. Basically, token holders have no direct benefit to vote and approve this - as $$ flies out. And they would prefer to not do it, I assume. However, if absence of a proper setup becomes a threat for some devs who currently “own & control” some pieces - this becomes an issue for token holders as a proper environment is not created. So that’s how I see it, and I am biased here.

What could be done is to give it another week (it has been already quite a few days) to see if other firms have a counter-offer and maybe a lower cost basis. If not, there isn’t much to choose from apart from keeping the way things are - but then again, referring to the previous paragraph of a setup.

Legal support and protection are necessary things in the current realities. I think such things will only benefit Gearbox.
At the same time, I have a question - how will DaoBox Inc. be controlled? How to quickly track all the decisions made, papers signed or other things fundamental to Gearbox?
Does the legal support cover any jurisdiction?
At the same time, in general, I support this proposal. Most DAOs do not think about the legal side of the issue. However, such carelessness can have dire consequences.

1 Like

Hi everyone,

Thanks for your discussions and thoughts on this proposal. Please see my comments below.

(a) Re. the wrapper use cases. The wrapper can be used for multiple purposes. The number of uses will likely grow with the development of the project. Besides legal protection for the DAO members, the uses could include collecting and managing the IP related to the project, products, marks, domain names, entering into agreements, taking and performing contractual obligations (thus protecting the DAO), managing accounts and subscriptions, making fiat payments, etc.

For example, if the GEAR DAO currently engages developers or contributors, even though the payments are made in crypto and on-chain, the rights in the developments produced do not actually vest in the DAO unless there is a contract in place and a person receiving the rights, i.e., the DAO does not own the results of such work.

In his post above, @ivangbi indicated some of the use cases that I can agree with. These sound reasonable.

I can also add that, eventually, every DAO needs a proper legal structure. And, in my opinion, the faster the structure is formed, the better.

(b) Re. Token allocation. This is a one-time allocation that is being asked for the whole time of our service, e.g. even if we will be managing the wrapper for many years. Also, note that we ask for an allocation in order to reduce the stablecoin fee – we can keep it low given the nature and level of our engagement, as well as the exposure and risks involved. Lastly, as there is no market for the token right now and, even though we do believe in the project, we are still taking the same financial risks as any GEAR stakeholder.

(c) Re. Control. @Second19 raised this issue, so I’ll discuss it a bit further. First of all, the wrapper will be subordinated to the GEAR DAO under its articles and memorandum, which means that resolutions adopted by the DAO will be obligatory for the wrapper and its management. Next, the purpose of the wrapper will be pre-defined and any step left or right will require the consent of the DAO. Any material transactions exceeding $10k will also require the consent of the DAO unless those have been pre-approved. Furthermore, we will be routinely reporting to the DAO on the activities of the wrapper and the use of the budget.

Please let me know if you need any further explanations or additional information.

Regards, Sergey

1 Like

Thank you for your reply, sir. At the moment, everything looks organic and orderly. I hope that everything will work out and we will be the most progressive and efficient DAO!

Hello Folks!

Introduction
A commerce graduate from Shri Ram College of Commerce, I am a fourth-generation Chartered Accountant and Lawyer. In the past, I have worked with KPMG, Ernst & Young, and UBS, in their Investment Banking Division (Finance); and Amarchand & Mangaldas & Suresh A Shroff & Co., and Luthra & Luthra, in their Mergers & Acquisitions Division (Legal). I’m also a ‘Blockchain’ & ‘Capital Markets Think Tank Member of The Institute of Chartered Accountants of India (ICAI).
[LinkedIn profile: https://linkedin.com/in/ca-bagai]

Currently, advising as the Founder & Chairman of Lawyer2CA® in the Tax, Mergers & Acquisitions, Intellectual Property, Contracts, and Compliance space.

Lawyer2CA® provides the following services:

  1. Business Incorporation
  2. Licensing
  3. Intellectual Property Law Advisory
  4. Contracts
  5. Virtual CFO Services
  6. GST Return Filing & Assessment
  7. Income Tax Return Filing & Assessment
  8. Mergers & Acquisitions Advisory
  9. Fund Raising and
  10. Compliance

Please find below our Proposal for the requirements desired:

Feel free to reach out to us via:
anirudh at Lawyer2CA dot com

1 Like

Greetings, sir. Let me ask - what is your advantage compared to the company of the author of this topic? You offer to familiarize yourself with the public offer that you send to all companies. Sorry if I’m wrong, but it seems to me that in such matters we need an individual approach to each DAO, and not a unified proposal for everyone. In this regard, I saw an individual attitude from another law firm, but not from yours. And this is immediately disturbing. You invite users to independently look for the pros and cons. It`s not cool.

Hi everyone,

This thread has been silent for some time so we’d like to share our thoughts on the alternative proposal submitted on Oct 25 (the “Alternative Proposal”). Bear in mind that we are a bit biased in this case.

(1) Around 70% of the Alternative Proposal is a copy-paste of our proposal. That’s totally weird and wrong from ethical and professional standpoints. Besides, the essence of our proposal does not match what is being offered in the Alternative Proposal making the whole proposal look really inconsistent (at least to me as a lawyer), see below. The commercial terms are also copy-paste of our offer with a minor discount.

(2) The Alternative Proposal contradicts the main concepts embedded in our proposal, such as decentralisation, no exposure for DAO members and team, subordination to DAO, etc. For example, the Alternative Proposal requires a contract to be signed on the part of the DAO which implies that someone from the DAO has to order this structure, reveal himself and take responsibility.

(3) The org. chart shows a 3+ entities structure and mentions licenses that can be obtained, although there is no rationale for such a structure, the choice of the jurisdiction and the need for the licenses and their types. I’m pretty sure that running a licensed business is not in line with the current structure and decentralised approach, not to mention that complying with the terms of an appropriate license will likely be impossible for a DeFi project as those imply identifying users, complying with travel rules, etc.

(4) The Alternative Proposal suggests using existing entities of the GEAR DAO which, in our understanding, do not exist as otherwise, all the proposals would be redundant.

There are several other points that I could discuss further, but I want to keep this text short and things - simple.

Cheers, Sergey

1 Like

Was a great call, thank you everyone and especially @millie <3 Vote?!

Voting started:
https://snapshot.org/#/gearbox.eth/proposal/0xff9d93e9b3c98506fefb3c66d770541c07d8c1515522f5c0d7533539d33c577c