Hello! This is the first blog post from Borderless.company, a RWA platform currently being developed by Overlay AG. Using the Borderless platform, you can start a company, tokenize your equity, legally sell equity and other tokens to investors, conduct on-chain governance, and distribute dividends or other tokens to token holders. Currently, we are focusing first on starting a DAO LLC entity in Japan, but we will be soon expanding to other entity types in additional crypto-friendly jurisdictions.
Borderless is currently under development and we will be announcing our first customer case study by the end of Q2 2024. In order to understand what can be done with Borderless, it would be helpful to understand the new DAO LLC entity type in Japan, which just became legal in April 2024…
Disclaimer: This post has not been checked by a lawyer. We have done our best to check this information but there may be some minor errors; please be aware.
Wikipedia defines a DAO as:
An organization managed in whole or in part by decentralized computer program, with voting and finances handled through a blockchain. In general terms, DAOs are member-owned communities without centralized leadership. The precise legal status of this type of business organization is unclear.
This legal status issue is now being solved in Japan. The blockchain industry has forever been seeking ways to fundraise by selling legally compliant tokens, as well as a method to connect blockchain-native DAOs to the legacy legal and financial systems. Some front running jurisdictions have experimented with new laws enabling these types of activities. For example, Switzerland’s DLT Law enables the legal offering of equity tokens and certain kinds of corporate actions to be conducted via blockchain. Similarly, in America, the State of Wyoming has also legalized a kind of DAO LLC. Starting April 22, 2024, Japan is joining the game by legalizing a new corporate entity type, ”合同会社型DAO”, Goudou-gaisha-gata DAO, which can be translated as LLC-type DAO. There is little English information available presently on this topic, but a few more details about the changes to the law, specifically how tokenized LLC membership rights are now treated differently can be found in this article, LLC-type DAOs are coming to Japan.
Japan’s DAO LLC legislation has been a year and a half in the making, which is actually quite fast. A DAO of its own, the Rulemakers DAO (RMD), was instrumental in working with the LDP (Japan’s ruling party, the Liberal Democratic Party) to enact this legislation. The RMD seeks to change the rules of Japan to adapt with the times and bring new prosperity. RMD coordinates through a Discord forum of around 500 members, many of whom are lawyers, seeking to “change the rules and make Japan a ‘great country’ again.” RMD also was instrumental in the recent passing of Japan’s new Digital Nomad working visa, which enables certain individuals to stay and work in Japan for up to 6 months. On April 1, some members of RMD established a new organization, the Japan DAO Association (JDA) to formalize their activities.
Registering a DAO LLC means your DAO has a real legal presence, so it can open bank accounts, own and manage assets (including IP, real estate, and securities), sell tokenized equity (and other tokens), distribute dividends to token holders, conduct governance on-chain, and much more, all while receiving the same limited liability of an LLC or corporation entity. There are still some limitations, described below, but overall this a monumental step forward.
Although we broadly refer to all of these as LLC DAOs, we envision four main kinds of organizations operating as DAOs.
Voluntary organization type DAO
Operate the DAO as a voluntary organization without corporate status.
NPO corporation type DAO
Operate the DAO as an NPO corporation, for certification process of receiving a future ta deduction
LLC type DAO
Operate the DAO as a for-profit corporation with the understanding that there are restrictions on the distribution of dividends
For profit-type DAO (future use case)
Operate the DAO as a for-profit corporation with no restrictions on the distribution of dividends
Of these four types of DAOs, the first three are made possible with this new legislation.
Here is a good reference about USA LLC officer titles. In summary, in the USA, owners of a LLC are called members. By default, all members of an LLC play an active role in the management of the company and have the authority to execute legal matters on behalf of the company. However, in a member-managed LLC, the execution rights may be delegated to a third-party manager or a specific member or group of members who are known as managing members.
In a Japanese DAO LLC, all investors are considered employees and vice versa. (These employees would be called members in the USA, i.e. everyone is a member.) This means all employees also have ownership rights. Employees are divided into executive employees and regular employees. Both of these employee types receive a unique token, discussed below. Since all employees are members (i.e. equity owners), we can just call everyone employees.
Let’s start by discussing the kinds of tokens Japanese LLC DAO members are given. As mentioned previously, in a LLC DAO, LLC DAO members are divided into executive employees and regular employees. Each type gets a certain kind of membership token which is called an employee rights token. Executive employees and regular employees have different regulations on the scope of activities and revenue distribution.
Executive Employees of a LLC DAO: Executive employee rights token
Scope of activities: Investment, participation in decision-making, engaging in all or part of the work, execute legal matters on behalf of the company
Expected role: early adopter, community manager, etc.
Revenue distribution: It is possible to distribute revenue beyond the amount of the original amount of investment, and capital gains can be made by selling shares on the secondary market, however the tokens cannot be transferred to non-executive employees
Basically, it respects voting by employees with the right to instigate a veto as a stopper when the DAO tries to commit illegal or immoral acts
Regular Employees of a LLC DAO: Employee rights token
Scope of activities: Investment, participation in voting to make decisions, and engaging in activities to contribute to the community
Expected role: Investor, bill to vote, execution of tasks within the DAO
Revenue distribution: Revenue distribution is possible but only up to the original amount of investment, and capital gains can be made through reselling of tokens on the secondary market
Non-Employee Community Members: “Additional Tokens“ (e.g. Rewards Tokens)
This additional token type functions as a reward for contributions, and can be given utilities and governance rights. It is expected to be optionally issued at a later time (see additional details below.)
NFTs currently used for token gated access to communities could be transitioned to this kind of token instead.
Can be given out in return for the execution of duties, usage of the platform, or bought and sold.
Can be issued or sold to employees and non-employees, including community members, and other stakeholders.
Someone in Japan wanting to join the DAO could purchase an employee rights token and also be issued multiple classes of additional tokens (rewards tokens) at the same time. These tokens can function as vouchers which can be redeemed for certain things, or resold.
Note: The additional token may be not used as a means to distribute revenue, thus getting around the restriction of employee rights tokens, whereby only an amount equal to the original investment can be distributed as revenue.
By using an LLC DAO entity, your group can fundraise startup capital by selling employee rights tokens to investors in Japan. This is essentially selling tokenized equity. All investors become employees (members.) Then you can immediately begin conducting decentralized on-chain governance. Employee rights token holders will have decision-making rights regarding how the funds raised are used.
Utilize the funds raised to grow assets and grow the business as a DAO.
After issuing executive employee rights tokens, you can also issue additional tokens. Additional tokens are other crypto assets (utility tokens, protocol governance tokens, etc.) and NFTs. You can raise additional capital by selling these tokens in an IEO. In addition to conducting an IEO, they can be distributed to contributors using methods such as airdrops, and holders of a certain quantity of these tokens can be given decision-making authority in governance decisions regarding the relevant tokens, for instance for protocol governance.
Conduct an IEO to list the additional tokens on Japanese centralized exchanges to raise further funds and realize capital gains. Later, list on overseas exchanges and expand overseas. (Note: when selling additional tokens, additional disclosures are required. These additional disclosures are also required to conduct an IEO on a Japanese exchange, so it is useful to conduct a domestic IEO before selling the tokens overseas.)
Advantages of having clear corporate status:
Members have limited liability
Entity can be the subject of assets (intellectual property, securities, real estate) and contract rights and obligations, can issue tokens and open bank accounts
Can solve problems in accordance with the law
Assets and treasury can be distributed upon dissolution
The good news
Crypto assets are not categorized as securities in Japan, so it is possible to start an investment type DAO (i.e. a DAO that raises funds to invest in other [crypto] assets).
In general, there is no cap on the amount of funds raised from selling tokens. However, in the case of an investment type DAO, there are certain restrictions and additional disclosures may be required (e.g. if over 100 million yen is raised, or the number of investors exceeds 500.)
DAOs can issue many kinds of additional tokens without restrictions (but this cannot be used as a method to distribute dividends without limitation; see the next point).
The bad news
For non-executive employees, dividends can only be paid up to the original investment amount. (This may be changed in the future.)
Executive employee rights tokens cannot be traded.
Non-executive employee rights tokens can only be transferred between other employees. Secondary marketplaces for this are coming soon.
All employee rights token holders must reside in Japan and are subject to KYC. However, this information is not publicly visible.
Stablecoins (including both USD and JPY) are not yet available in Japan (however, this should change soon.)
Use of DAO LLC by Overseas Groups
Unfortunately, the owners/members/employees (i.e. both types of employee rights token holders) of a DAO LLC must reside in Japan, and their addresses must be recorded with the government. This limits the usefulness to overseas groups.
However, there are some use cases which might be helpful for foreign groups. For instance, a Japanese DAO LLC with an in-country management team could be incorporated as a subsidiary of a group or company external to Japan. This mechanism could be used for DAO based treasury measurement for an overseas project. This would enable the treasury to be a legal entity with a corporate bank account in Japan.
Borderless.company is an RWA platform being developed by the Swiss corporation Overlay AG for tokenizing a company and operating it on-chain. Overlay is made up of a core group of engineers, entrepreneurs, and long term blockchain and DAO proponents.
Using Borderless, one can easily start a DAO LLC, sell equity tokens, distribute dividends, and conduct governance using a choice of blockchains. Initially the Borderless platform is targeting the incorporation of Japanese DAO LLC entities, but our roadmap is to add support for additional favorable jurisdictions next.
Our aim is to standardize the share tokenization process around the world, intricately intertwining physical and digital, law and technology, enabling businesses everywhere to utilize this next generation of company models.
The Borderless platform is currently under development and targeting a soft launch at the end of June. If you’re interested in being an early adopter of the Borderless platform, please reach out to us!