Executive Summary
This post serves as a follow-up to our research regarding the V4 Reinvestment Controller, focusing on the practical aspects of establishing a legal institutional setup.
As the Aave DAO considers expanding into off-chain regulated financial products—such as fund subscriptions and institutional lending—it faces a structural gap: the DAO itself cannot sign contracts, hold legal title to assets, or undergo KYC/AML procedures. To bridge on-chain governance with off-chain legal infrastructure, the DAO may establish a legal entity to serve as its contracting agent.
The structure explored below is a Cayman Islands Foundation Company. This vehicle is particularly suitable because it can be structured without shareholders (“memberless”), allowing governance to be routed through constitutionally designated supervisors rather than equity owners. This setup would allow the entity to:
- Subscribe to regulated products as a holder of record.
- Maintain necessary brokerage and custody accounts.
- Execute subscriptions and redemptions in accordance with on-chain governance instructions.
However, several open questions remain regarding the specific regulatory characterization of this entity, particularly concerning its status under the Virtual Asset Service Providers Act (VASPA) and the beneficial ownership transparency regime. These residual risks will require further factual input from the DAO and specific legal counsel before implementation.
Context: The Need for a Legal Wrapper
Aave DAO has demonstrated a sustained capacity for on-chain coordination and may elect to expand into off-chain, regulated financial products—including, without limitation, fund subscriptions, institutional lending arrangements, and products that require interaction with licensed custodians and fund administrators. These off-chain products are structured around legal persons: fund administrators, custodians, prime brokers, and counterparties require a legally cognisable entity with which they can contract, which they can onboard under applicable know-your-customer procedures, and against which they can enforce contractual rights.
The DAO is not, by itself, a legally cognisable actor under any jurisdiction in which it currently operates. It cannot, in its unincorporated form, enter into contracts, hold legal title to assets, open or maintain accounts, make onboarding and eligibility representations, or bear liability in a conventional sense. The practical bridge between on-chain governance and off-chain legal infrastructure is therefore an entity—or an agent—that can perform these functions.
The proposed structure is a Cayman Islands foundation company that will act as the DAO’s contracting agent for off-chain regulated products. In operational terms, it is assumed that the foundation company will:
- (a) Subscribe to fund shares or other regulated product interests as holder of record;
- (b) Hold those shares or interests in its own name;
- (c) Open and maintain brokerage, custody, and banking accounts necessary to hold and transact in those interests;
- (d) Execute subscriptions and redemptions in accordance with binding governance instructions received from the DAO through a governance process that is constitutionally mirrored into the foundation company’s documents; and
- (e) Bear contractual liability to counterparties in its capacity as a Cayman corporate entity.
It is further assumed that the foundation company will be structured as a memberless foundation company, with governance exercised through constitutionally designated supervisors and directors rather than through equity holders, and that on-chain governance decisions will be transmitted to the foundation company through a defined mapping of governance processes into the entity’s constitutional documents and bylaws.
The Cayman Foundation Company: Legal Anatomy and Suitability for DAO Structuring
1. Jurisdictional Rationale
The Cayman Islands’ suitability for DAO-adjacent structuring rests on three institutional features that extend beyond the commonly cited attribute of tax neutrality.
Institutional Interoperability
A Cayman foundation company is a body corporate under the Companies Act with separate legal personality, the capacity to hold assets, to contract, and to sue and be sued in its own name. At the same time, the Foundation Companies Act permits the entity to be formed for “any lawful objects,” including objects that need not be beneficial to any other person, and prohibits dividends or distributions of profits or assets to members in their capacity as members. This combination of corporate personality with purpose-driven, non-distributive character produces a vehicle that regulated counterparties—fund administrators, custodians, and prime brokers—recognise as a conventional corporate entity, without introducing equity ownership that would contradict decentralised governance narratives.
Governance Engineering Flexibility
The Foundation Companies Act expressly allows the constitution to allocate rights, powers, and duties to members, directors, officers, supervisors, founders, or other persons, including powers relating to appointing and removing officers, making bylaws, supervising management, enforcing duties, calling and voting at general meetings, altering the constitution, and winding up the company. The Act further provides that a foundation company may adopt bylaws binding on directors, officers, their delegates, and any other person with duties or powers under the constitution, and that such bylaws do not form part of the constitution and are not required to be filed with the Registrar of Companies. This two-tier architecture—publicly filed constitutional documents supplemented by private, unfiled bylaws—enables the foundation company to present a conventional face to external counterparties while maintaining internal operating rules that may be linked to on-chain governance mechanics.
Mature Compliance and Regulatory Ecosystem
The Cayman Islands’ sanctions framework is implemented through Orders in Council extending the United Kingdom’s sanctions regimes to the Cayman Islands, with the effect that the sanctions in force in the Cayman Islands are essentially the same as those imposed in the United Kingdom. The Cayman Islands also implements United Nations Security Council resolutions on terrorist and proliferation financing through local legislation. From a counterparty risk perspective, this familiar sanctions perimeter may facilitate onboarding for institutional counterparties, provided the foundation company implements and maintains adequate screening and compliance controls.
2. Formation and Constitutional Architecture
A Cayman foundation company is formed under the Companies Act and acquires its foundation company status through compliance with the additional requirements of the Foundation Companies Act. Its constitutive documents are its memorandum and articles of association. The memorandum must state that the company is a foundation company, describe its objects, provide (directly or by reference to the articles) for the disposal of surplus assets on winding up, and prohibit dividends or other distributions of profits or assets to members in their capacity as members. The company must adopt articles of association.
The foundation company must at all times have a secretary who is a “qualified person”—defined as a person licensed or permitted under the Companies Management Act (Revised) to provide company management services in the Cayman Islands. The qualified secretary has a regulatory function: the foundation company cannot accept asset contributions unless the secretary has given notice that there appears to be no objection under applicable regulatory laws. The registered office of the foundation company must be at the secretary’s registered office. Criminal sanctions apply for contravention of the Secretary’s requirements.
3. The Memberless Feature and Supervisory Governance
The memberless feature of a Cayman foundation company is the central structural attribute that renders it suitable for DAO use. Section 4 of the Foundation Companies Act provides that a foundation company may cease to have members if its memorandum permits or requires that outcome and the company continues to have one or more supervisors. The cessation of members does not affect the company’s existence, capacity, or powers. A foundation company that has ceased to have members cannot later re-admit members or issue shares unless its constitution expressly authorises that step.
In DAO practice, the memberless structure enables what is sometimes described as an “ownerless wrapper”: a corporate entity in which governance authority is routed through constitutionally defined mechanisms rather than through equity ownership. The absence of members eliminates the conventional agency relationship between shareholders and directors, and replaces it with a governance architecture in which supervisors—who have an unconditional right to attend and vote at general meetings under the constitution—perform the oversight function that shareholders would ordinarily perform.
A supervisor is defined as a person, other than a member, who, under the foundation company’s constitution, has an unconditional right to attend and vote at general meetings, whether or not that person has supervisory powers or duties. The constitution may confer on supervisors the power to appoint and remove directors, access the company’s files, books, and accounts, and exercise other oversight functions. The foundation company must maintain a Register of Supervisors at its registered office, which must be updated within sixty days of any change in supervisors.
4. Enforceability of Objects and Dispute Resolution
The Foundation Companies Act provides that a foundation company has a duty to carry out its objects only if the constitution expressly declares it must do so and designates persons with standing to enforce that duty by action against the company. This is a design choice, not a default. If the DAO wishes the foundation company to be legally bound to pursue its stated objects—for example, to execute subscriptions and redemptions in accordance with on-chain governance decisions—the memorandum must expressly create that obligation and identify the enforcers.
With respect to dispute resolution, the Foundation Companies Act permits the constitution to require the resolution of disputes by arbitration or other lawful methods. The Act further provides that any resolution effected in accordance with the constitution cannot be set aside unless a party has committed fraud or acted in bad faith.
#Operating Model for the Foundation Company as DAO Contracting Agent
1. Governance Architecture and Constitutional Design
The foundation company’s operating model must bridge on-chain governance decisions and off-chain legal authority. The proposed architecture is as follows:
- The foundation company’s memorandum and articles of association establish the entity’s objects, define the governance roles (directors, supervisors, officers), allocate powers of appointment and removal, and create the enforceability framework.
- The bylaws contain detailed operational procedures, including mapping on-chain governance decisions to off-chain authority, signer policies for operational multisigs, quorum and voting thresholds for specific categories of action (subscriptions, redemptions, emergency measures), and escalation procedures for adverse events.
This two-tier structure is advisable because it allows the foundation company to present a conventional set of constitutional documents to counterparties—who need to see that the entity is properly governed, that directors have authority to bind the company, and that there are mechanisms for accountability—while reserving the operational detail of DAO governance integration for the internal bylaws. Third parties dealing in good faith with the foundation company are not required to look into compliance with the bylaws.
2. Director and Supervisor Selection
The foundation’s company directors are the legal decision-makers for the outside world. They bear fiduciary duties to the foundation company (not to the DAO or to governance token holders), and those duties are owed only to the foundation company unless the constitution provides otherwise. In practice, the DAO must appoint directors who are willing and able to act within the governance parameters established by the constitution and bylaws, including by declining to act on instructions that fall outside the company’s stated objects or that would breach applicable law.
It is reasonable to include at least one Cayman-based professional director who is familiar with local regulations and can liaise directly with the registered office and CIMA. The supervisors, who perform the oversight function in place of shareholders, should be selected for their ability to monitor compliance with the company’s objects and governance processes. The constitution should specify the mechanism by which DAO governance can appoint and remove directors and supervisors, subject to any necessary protections against arbitrary or precipitous removal.
3. On-Chain to Off-Chain Governance Mapping
The DAO must provide a written mapping from on-chain governance to off-chain authority. At a minimum, this mapping must address:
- (a) Who can instruct the directors and under what circumstances;
- (b) What approvals are required for subscriptions, redemptions, and other material transactions;
- (c) What quorum or voting thresholds apply to different categories of decision;
- (d) How emergencies—such as a rapid market decline requiring urgent redemption, or a regulatory inquiry requiring immediate response—are handled; and
- (e) How conflicts between on-chain governance decisions and the directors’ fiduciary duties are resolved.
The Foundation Companies Act permits constitutions and bylaws to allocate these rights and processes, including the appointment and removal of directors and supervisors, as well as internal supervisory and enforcement mechanisms.
4. Asset Flows and the Secretary’s Regulatory Function
The DAO must specify exactly which assets will move into and out of the foundation company, from whom, to whom, in what legal character, and under what redemption or withdrawal mechanics. The Foundation Companies Act restricts the acceptance of asset contributions unless the qualified secretary has assessed that there appears to be no objection under applicable anti-money laundering laws. This statutory gating function means that every inbound asset flow to the foundation company must pass through the secretary’s compliance assessment. The DAO must therefore provide sufficient information about the source, nature, and provenance of assets to enable the secretary to discharge this function.
Residual Risk and Open Questions
The following questions remain unresolved based on the information currently available and require further factual input from the DAO and additional legal development involving qualified Cayman Islands attorneys.
- VASPA Perimeter: Whether the foundation company’s anticipated activities include any handling of virtual assets (receiving governance tokens, converting virtual assets to fiat, holding virtual assets in treasury) that could bring it within the VASPA perimeter. Resolution requires a precise description of the asset flow and conversion chain from the DAO treasury to the foundation company.
- Principal vs. Agent Characterisation: Whether the foundation company is properly characterised as dealing in securities as principal or as agent for the DAO. This affects the availability of the SIBA Schedule 3 exclusion and depends on the degree of discretion vested in the directors and the legal characterisation of the DAO-foundation company relationship. Resolution requires a detailed review of the proposed constitutional documents.
- Fund Status: Whether the combined DAO-plus-foundation-company structure could be characterised as a de facto mutual fund or private fund. Resolution requires analysis of whether governance token holders have redemption rights, a right to participate in investment returns, or other characteristics that mirror fund-investor relationships.
- Beneficial Ownership: Whether any persons—including DAO delegates, multisig signers, or core contributors—exercise “ultimate effective control” over the foundation company for purposes of the Beneficial Ownership Transparency Act, and if so, who must be reported as registrable beneficial owners. Resolution requires mapping of the specific governance architecture to the statutory control tests.
- Extra-Territorial Exposure: Whether extra-territorial regulatory exposure—in particular, the potential for US-based DAO participants to create US regulatory exposure for the foundation company. This question is noted for Cayman structuring purposes but requires separate advice on foreign law.
Disclaimer
This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.