The Sushi decentralized autonomous organization (“DAO”), the governing organization behind trading platform Sushi or SushiSwap, recently approved a legal restructuring on October 26 for its DAO and developer team. The entity structure, which received unanimous approval from the DAO, will divide DAO functions between three entities.
The first entity will be a Cayman Islands foundation (the “DAO Foundation”), which will be formed to administer the Sushi DAO “IRL” through a governance council. The plan seeks to provide the entity with the “flexibility to administer the Sushi on-chain governance process and facilitate off-chain activities.” The DAO Foundation will administer a treasury and grants, among other operational functions.
The second entity will be a Panamanian foundation to develop and manage the existing Sushi protocol, specifically including smart contracts. The Panamanian foundation will enter agreements with service providers—selected by the DAO—to develop and refine the protocol.
Finally, the third entity will be a Panamanian corporation to operate the front-end, graphical user interface (“GUI”) layer of the protocol. Sushi DAO’s second entity, the Panamanian foundation, will wholly own the corporation. Like the Panamanian foundation, the Panamanian corporation will enter service agreements to develop and maintain the GUI layer of the protocol.
The Sushi DAO community and its counsel considered other jurisdictions before settling on the Cayman Islands and Panama for entity formation. The group initially considered placing the firms in Switzerland, but ultimately found the use cases were “inappropriate” given Sushi’s current activities. Users also noted that the Swiss regulatory stance toward Sushi products was “less than ideal” and that the country’s taxation model was “not favorable to growth companies.”
Rather, according to Sushi’s “head chief” Neil Bhasin, Panama was proposed because Panamanian foundations “are non-commercial in nature and do not have beneficial owners.” Daimon also noted that there is no corporate level tax on the Panama entities, among other factors that contributed to the choice of Panama for two of the platform’s entities.
The shift occurs during a time of increased scrutiny of DAOs by regulatory agencies, manifested by a recent a Commodity Futures Trading Commission (“CFTC”) lawsuit against Ooki DAO for alleged violations of commodities trading laws.
Other DAOs have made recent moves to limit potential liability and increase organizational efficacy. In August, Uniswap created an independent foundation to reduce friction in governance and support protocol development. Earlier this week, Gnosis’ SafeDAO passed a proposal to create a participation agreement that is in part designed to “limit the liability of SafeDAO participants and other protected persons.”
However, as community member Daimon Legal made clear in the voting thread, there are numerous potential issues with the new proposal including: the complexity of the structure proposed, the number of entities servicing the DAO, and fulfilling economic substance requirements. In particular, the Sushi DAO needs to consider new “expansive” proposals from the Financial Action Task Force (“FATF”) on Virtual Asset Service Providers (“VASP”).
The membership of FATF is now harmonizing around shared requirements for registration, monitoring, counterterrorism programs, and anti-money laundering across the world, including the countries in which Sushi DAO is creating its new management entities. As a result, if the intent of the proposal is to find safe havens with lighter regulatory scrutiny, particularly from regulators in the United States, Sushi DAO members may be sorely disappointed.
Instead, DAOs should consider a Wyoming DAO LLC or other entity that can reduce the potential issues with administering multiple organizations in different countries, while demonstrating to government officials that the goal of legal re-structuring is not to evade new regulatory developments. While some have criticized DAO laws because “organizations under the term are so amorphous,” they afford legal protections to both token holders and management, and are specifically fit to the unique structures that DAOs contemplate. As new legal problems and issues emerge, legislators will be able to refine and improve upon these laws in a transparent manner that is responsive to regulators and industry.
We will have to wait and see what effects the new restructuring will have upon Sushi and the wider debate on the appropriate legal form and situs for DAOs. However, if regulators conclude that the true purpose of the proposal is to obfuscate the functioning of Sushi in numerous foreign jurisdictions where it is difficult for DAO members and regulatory authorities to oversee corporate activities, then substantial challenges may lay ahead.