Polywrap Foundation Setup Proposal

Governance Proposals
#1

Snapshot Link: Link

Summary

We propose that the Polywrap DAO form a legal entity in the Cayman Islands called the Polywrap Foundation.

Motivation

The choice of the Cayman Islands was advised by our U.S. legal team, DLx and our Cayman Islands counsel, Walkers Global. The advantages of having a foundation in the Cayman Islands are as follows:

Flexibility: The Cayman Islands company law does not require any directors or officers of the foundation to be a resident in the Cayman Islands. A Cayman Islands foundation is also not required to have members, but provides the flexibility for WRAP holders to direct the actions of the Foundation by providing notice to the Foundation Director of proposals approved by the DAO.

Incorporation: Incorporation fees are low and the process to set up the foundation would only take a few days.

Tax: Cayman Islands foundations are tax neutral.

Snapshot Proposal

Link

Requirements

The Polywrap DAO will be setting up the foundation with assistance from Walkers Global.

Cayman Islands Foundation Representatives

The DAO has already approved the following reps for the entity to be formed:

  • Registered Office / Secretary
  • Director
  • Supervisor

The role of the registered office is mainly administrative. They allow us to meet the requirement of having a physical location in the Cayman Islands and to receive mail such as legal notices.

The role of the Director is to manage the foundation on behalf of the DAO. The DAO will be voting on proposals which the Director will be responsible for executing, such as signing legal documents.

The supervisor plays a similar role to the Director. They also supervise the Director to ensure that the Director is doing their job.

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#2

How much power do the Director and Supervisor have? Could they ignore WRAP holder votes?
What are the primary tasks of the foundation? I’m guessing legally paying out contributors and managing raised funds and legal notices?
There might be legal/tax implications for contributors working directly for Polywrap. From the point of view of their countries/banks they’re directly working for a company based in the Cayman Islands which might have AML implications. That heavily depends on the country, I guess.

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#3

I’m interested in the answers to Jure’s questions and I also have a couple more:

  • Who was appointed the Director?
  • Who will legally own Polywrap? How does that work?
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#4

Jure’s and Kris’s questions raise legitimate concerns that we may be glossing over in the interim.

Currently, as a DAO, decisions are made (mostly) via voting by members and/or WRAP holders. Semantics aside, setting up Polywrap as a foundation technically steers it in the direction of a “corporation”. This is why a director and a secretary are required for the setup…

Ultimately, the director will have some “veto” powers in critical decisions that most DAO members may not necessarily agree with; however, such decision may have to be made because they’re time sensitive. In the final analysis, we lose a “bit” of decentralization, although the benefits of such an arrangement may outweigh the costs. If we’re okay with this tradeoff, let’s go for it!

#5

1. How much power do the Director and Supervisor have?

  • The Director has a fiduciary duty to the foundation. The governing documents of the foundation, the Memorandum of Association and the Articles of Association, provide that the Director is responsible for managing the business and affairs of the foundation and mandate that the Director always act in the best interest of the foundation. The Director also has an obligation to implement Token Holders Resolutions which are proposals voted on and approved by WRAP (or Wrap IOU) Token Holders (for example, signing agreements, or approving the disbursement of assets held in the treasury).

  • The Supervisor has oversight over the Director and also has a duty to act in the best interests of the Foundation. The Supervisor can review Foundation files and accounts, request reports from the Director, and can vote at general meetings.

  • Both the Director and the Supervisor can be appointed and removed by Token Holders’ Resolution.

2. Could they ignore WRAP holder votes?

  • The Director is obligated to implement Token Holders’ Resolutions so long as they are in compliance with applicable law and not inconsistent with the purposes of the Foundation (set out in question 3 below).

3. What are the primary tasks of the foundation?

  • A) to facilitate, support, promote, operate, represent and advance the open-source development and adoption of Polywrap and blockchain related technology and software;
  • B) to enter into commercial agreements or relationships in furtherance of the above object; and
  • C) to do all such things as in the opinion of the directors are or may be incidental or conducive to the above objects or any of them.

4. There might be legal/tax implications for contributors working directly for Polywrap.

  • Yes. Members of the DAO should be sure to consult with legal and tax professionals in their jurisdiction to ensure that they are meeting all applicable legal and tax requirements.

5. Who was legally appointed Director?

  • LML

6. Who will legally own Polywrap?

  • The Foundation will legally own Polywrap. The Foundation will act at the direction of the DAO via Token Holder Resolutions. The Foundation will also maintain a treasury consisting of unallocated WRAP and other digital assets obtained through commercial activity directed by the DAO via Token Holder Resolutions. The treasury will be available to fund DAO operations pursuant to Token Holder Resolutions.
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#6

I just saw that, while the snapshot vote has already started. Sorry for being late to the party. However there’s still time for questions before the vote is closed, so here I go:

“Motivation”: do you have more comprehensive material available? If the choice is primarily dictated by the advice of the US legal team, is there a written note from them I could read? Who is DLx? I assume that the advice of the Cayman Islands counsel is biased for obvious reasons, so I’m less interested (but happy to be proven wrong)

Also, regarding motivation, I’d like to understand not only the choice of Cayman vs other jurisdictions (it seems to be the main point here) but the very purpose for incorporating.

Again, very sorry if I missed the conversation in Discord about that. Is it required for an investment round? for avoiding risks related to implicit general partnership? Why do we need it now?

In general, a foreign operation found to have a U.S. trade or business has effectively connected income
which will subject it to U.S. income tax on the portion of the income that is effectively connected to that
U.S. trade or business.33 If a foreign operation’s intellectual property was developed in the United States,
or key employees or directors were present in the United States for significant periods of time, the IRS
can attribute the portion of business being conducted in the United States as taxable and require the
necessary tax filings, tax reporting and payments to resolve.
(from a16z’s DAO Legal Framework)

Where do we stand wrt this risk? I have a sense that Polywrap’s contributing team and funders are truly global, but is this perception correct?

To summarize my position, I have an instinctive aversion to using legal vehicles in tax havens. I’ve been working on workable alternatives in Europe, like a French association setup adapted to DAO/DeFi projects, that fosters the legitimacy of such projects in their legal and social environment.

What would make this proposal acceptable for me:

  • Polywrap’s contributors and funders are truly globally distributed since the beginning, so there’s no “natural” jurisdiction to select. Therefore, it is almost a fiduciary duty as token holders to choose the best jurisdiction available to us
  • There’s a compelling reason to have a legal wrapper for the DAO now. I assume that this is both a legal protection (general partnership issue) and a necessity for the next funding rounds,

I’d love your confirmation and comments so that I can vote in peace :slight_smile: :peace_symbol:

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#7

Hey @philh ,

Purpose for creating entity – Establishing a legal entity will allow the DAO to contract with other people and entities in furtherance of Polywrap. The DAO will also benefit from having a legal entity through which it can meet tax obligations and avoid a potential default tax characterization as a general partnership.

Motivation – The choice of entity and jurisdiction was motivated by legal considerations. The Cayman Foundation structure represents the most utilized approach for DAO entity issues. The flexibility of a Cayman Foundation allows for full participation and direction by DAO members in governance in the context of a memberless organization. In addition, because DAO members are globally distributed there is no natural jurisdiction that is a principal place of operation.

Tax issues – with respect to the tax issues raised, there are certainly important considerations both for the Foundation and the DAO members individually. We are working with the primary author of the cited paper, David Kerr of Cowrie LLC to assess the tax implications and assist in the tax planning to ensure compliance with any reporting obligations.

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