Establish Nouns DUNA in Wyoming and fund first year of operations

Establish Nouns DUNA in Wyoming and fund first year of operations

Update: After a spirited debate period we are ready to promote this candidate to full proposal status! During the candidate period, we decided to make two changes to the proposal:

• This proposal now includes a line item to cover the Foundation’s current shortfall. This was mentioned in the original candidate, but a more precise calculation follows: Big Four Accounting: $225,000, Latham & Watkins: $113,390, Walkers: $7,644. Total: $346,034. Current Foundation Assets: $279,000. Shortfall: $67,034
• This proposal now includes a line item to cover the cost of stream-based minority protection audit funding. Consider this a bundling of proposal 653 and this proposal (where the only difference is that the Foundation will now escrow the funds). To read more, please see https://www.nouns.camp/proposals/653

Foundation shortfall: $67,034
Stream-based audit funding: $82,000
Original proposal: $726,000

New total: $875,034

This proposal is the culmination of hundreds of hours of work from Foundation members, protocol devs, project founders, Noun owners (large and small), lawyers, accountants and more. Thank you for your contributions.

• What are we voting on with this proposal?
  • This proposal is a referendum on Nouns converting to a Wyoming DUNA. If it passes, the proposal funds Nouns Foundation with sufficient resources to establish a DUNA and fund its first year of operations
  • For additional context, please see: https://foundation.nouns.wtf/2024/09/06/duna/
• What is the Nouns Foundation
  • The Nouns Foundation is a Cayman Foundation that was set up early in the history of the DAO as a preliminary legal structure for the project
  • As Nouns and the regulatory landscape that surround it have both evolved in the past 3 years, we believe that it’s time for a new legal structure for the project
• How has the Nouns Foundation used the funds from Proposal 39
  • Nouns Foundation Safe
  • Original proposal for 458 ETH ($1,420,690 in March 2022)
  • Since the original proposal, $720,000 in aggregate has been spent on accounting and tax advisory (big four), Walkers (Cayman legal), Latham & Watkins (US legal), Teknos (IP valuation and transfer), Nouns.wtf hosting expenses, Foundation Twitter hack reimbursement, and travel expenses for directors ($15,000)
  • 5 out of 6 Directors opted not to be compensated for their work on the Foundation board. This represents savings of $450,000 (5 x 30,000 x 3 years) vs. the original proposal which allowed the Foundation to significantly stretch its original budget
  • As of this writing, the Foundation has $278,000 in assets remaining and outstanding liabilities of $325,000*
  • The remaining delta vs. original proposal amount is accounted for by ETH depreciation (as with other proposers Foundation has since adopted working mostly in USDC)
  • Invoices and wire receipts are available for a DAO appointed member to review
• Why DUNA, why now?
  • Creating a legal entity and tax payer that’s aligned with the DAO’s economic substance is the right thing to do – and imperative from a legal standpoint
  • In the absence of converting to a legal entity such as a DUNA, there’s an ongoing risk that DAO members may be liable for the DAO’s and each other’s actions or failures to take action
  • Increasing perceived and actual legitimacy of the DAO could unlock new forms of demand for Nouns and opportunities with collaborators and partners
• Why not [other org structure / jurisdiction]
  • DUNA is tailor made for DAOs. It is the only legal structure that enshrines members’ right to vote onchain while permitting anonymous participation, along with a host of other specifications that accommodate DAO activity
  • DUNA is consistent with the directional trend of the economic substance of the DAO
  • The USA is the jurisdiction that creates most legitimacy and is most aligned with the project’s current obligations and objectives
• How will DUNA governance work?
  • While this is still a work in progress, we can share what we know so far
  • Veto will be thoughtfully moved from Foundation to DUNA
  • DUNA will authorise an “administrator.” Under the DUNA statute, the DAO has the ability to narrowly circumscribe the administrator’s authority to align it with the DAO’s governing principles. We envision this person akin to the Chief Compliance Officer for the project. They will be responsible for making sure taxes are filed, overseeing KYC of grants, and making sure vetoers are aware of potentially problematic proposals; however, we are open to input from the community on how to authorize the administrator!
  • DUNA allows for the DAO’s other governance principles to be incorporated into the legal entity structure – a unique feature as compared to other legal entities
  • Verbs team is working with the Nouns Foundation to achieve onchain automation of as many compliance processes as possible. This will ensure maximum public visibility into the processes and minimal ongoing costs and overhead for the DAO
  • For example, upon Noun sales and after offsetting deductions, income taxes can be calculated and paid. Further, indirect taxes like VAT can be automatically withheld and sent to the DUNA wallet for the administrator to remit
• Are there historical liabilities associated with the DAO
  • The current construction of Nouns leaves a lot of uncertainty about how historical transactions could be interpreted for tax purposes
  • Because of the broad range of jurisdictions that Nouns touches, those historical transactions are subject to interpretation by regulators from many parts of the world - essentially everywhere there’s a Noun buyer or holder. Those interpretations could lead to direct income taxes, indirect taxes (like VAT) and withholding taxes on payments made from the Treasury.
  • It’s our assessment that adopting the DUNA is the best path forward, allowing us to position and execute the transaction flows in a compliant manner, formalise the DAO in a single jurisdiction and thereby reduce uncertainty regarding global tax obligations, and ultimately simplify the tax treatment of the DAO.
• Would it be useful for Nouns to become a registered non-profit 501(c)(7) organisation?
  • Preliminary research suggests that there’s a possible path to becoming a registered non-profit 501(c)(7) organisation post conversion into the DUNA
  • While this outcome is not guaranteed and has its own set of constraints and obligations, it could lead to significant tax efficiencies for the DAO
  • Foundation and its advisors felt that pursuing DUNA and 501(c)(7) simultaneously represented too much complexity. We will undertake pursuing 501(c)(7) post-DUNA
• What kind of budget is required for the re-org / first year of DUNA operations?
  • Foundation:
    • Tax and Accounting (estimate provided by big four advisor):
      • Analysis of historical liabilities: $95,000
      • Transition to DUNA: $50,000
      • Analysis of possible classification as a 501(c)(7): $30,000
      • Analysis of the characterization of auction revenue: $40,000
      • Total: $215,000
    • Legal (estimate provided by L&W):
      • Outline of DUNA transition, drafts of agreements for DUNA administrators and other governing documents: $50,000
    • Cayman counsel:
      • Foundation wind down: $20,000
    • Contingency 20%:
      • ($215,000+$50,000+$20,000)*.2 = $57,000
    • Total: $342,000
    • Any remaining Foundation funds will be sent to DUNA at time of wind down
  • DUNA:
    • First year of DUNA operations:
      • Administrator fees: $200,000
      • D&O insurance (if possible): $25,000
      • Bookkeeping, accounting: $50,000
      • KYC SaaS and other operations compliance software (ie. Persona): $20,000
      • General legal: $20,000
      • Annual filings: $5,000
    • Contingency: ($200,000 + $25,000 + $50,000 + $20,000 + $20,000 + $5000)*.2 = $64,000
    • Total: $384,000
  • Total: $726,000
• Why does it cost so much?
  • We’re using the leading firms in the space
  • Nouns represents a lot of novelty / complexity and the amount of analysis that has to be done is significant
  • All recommendations take many hours of research and collaboration between legal and tax experts and Foundation board members / Nouns experts
• What happens if this proposal fails?
  • In a scenario where the DAO is unable to adopt best practices and legal structures that are consistent with its economic activity, its potential liabilities will make it too risky for many of its members
  • The DAO will suffer ‘brain drain’ as legally conscientious members exit
  • What remains of the org will lack legitimacy in the eyes of potential partners and collaborators
  • Given Nouns emergent mission of doing good and partnering with leading brands and charities, we believe the DAO is unlikely to succeed in this scenario
• This proposal also increases the fork threshold to 100%, why does it do that?
  • DUNAs are not allowed to make distributions to their members
  • At the time the DAO signals its desire to become a DUNA, it should also begin to undertake DUNA compliance
  • The mechanism described here will replace the fork mechanism

Please note that the DAO does not automatically become a DUNA with the passing of this proposal. If this proposal passes, the DAO will undertake the legal requirements of the conversion and a future event will occur to memorialise the transition, whether in the form of an announcement from the Foundation or another onchain proposal