Decentralized Autonomous Organization under Japanese Law
November 9, 2022
Introduction
Clients often ask us whether it is possible to structure a Decentralized Autonomous Organization(DAO) in Japan. Currently, Japan does not have regulations targeting DAOs, unlike Wyoming
State or the Marshall Islands. So, we have written this article summarizing what is typicallyconsidered when forming a DAO in Japan.

1. DAO
1.1 What is DAO?
A decentralized autonomous organization (DAO) is a new legal structure with no central
authority and members committed to acting in the organization's best interests. DAOs are used tomake decisions in a bottoms-up management style and have gained popularity among
cryptocurrency enthusiasts and blockchain technology.
1.2 Classification of DAOs
There are several classifications of DAO described below:
1. Investment DAO
Investment DAOs are for-profit DAOs aim at co-investing in a project. They are more likely toattract funds than Grant DAOs because they aim to generate profits mainly through "economiccapital."
Examples: Genesis DAO, The LAO, BitDAO, etc.
2. Grant DAO
The community contributes monies to the grant pool and votes on funds allocation anddistribution decisions in a Grant DAO. Innovative DeFi projects are funded using these DAOs,
showing how decentralized communities are more flexible with funding than traditionalorganizations.
Examples: MolochDAO, MetaCarteDAO, Aave Protocol, Uniswap Grants, etc.
3. Protocol DAO
When tokens serve as a voting metric for implementing any changes in the protocol, such agovernance structure represents protocol DAOs. For instance, MakerDAO has revolutionized
the DeFi space with its DAI stablecoin.
Examples: Maker, Compound, Uniswap, Aave, Yearn, Sushi, etc.
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4. Service DAO
A Service DAO is a decentralized working group. They can receive tokens as compensation
for their projects.
Examples: RAID GUILD, DXdao, PartyDAO, etc…
5. Social DAO
A Social DAO offers digital democracy where opinions are heard, and people can sharecommon interests.
Example: Bored Apes (BAYC)
6. Collector DAO
Artists who use nonfungible tokens (NFTs) to create art rely upon collector DAOs to establish
ownership of their art.
Example: PleasrDAO
7. Media DAOMedia DAOs allow product owners of content (i.e., readers) to contribute directly without
involving advertisers for the native token as a reward in return for their contributions.
Example: Fore Front (FF), Bankless DAO, etc…
Source https://cointelegraph.com/daos-for-beginners/types-of-daos

1.3. Example of an Existing Overseas Law
A few places where DAOs are regulated are Wyoming State and the Marshall Islands. Below is a
short description of forming a DAO in the Marshall Islands.

The Legal Form of a DAO on the Marshall Islands
Marshall Islands proposes a non-profit corporation (limited liability company) as a legal entity
form for DAO, which stands out from the general practice to establish DAO as a foundation.
Such a company is established in compliance with the general corporate law of the MarshallIslands with specific features that:•No part of the income or profit of the corporation is distributable to its members,directors, or officers; and2

••

Members' ownership of such a company may be defined in such a plain document as
the register of members AND in the company's smart contract.
You must clearly state the company's purpose and connect it to the non-profit activity.
The purpose will be furtherly indicated in the Certificate of Incorporation.

How does this work?
Generally speaking, such a company works as a limited liability company managed by itsmembers. It has three essential constitutional documents: Certificate of Incorporation,
Operating Agreement, and Charter of the Company.
The Operating Agreement should include the most crucial matters of your DAO management:••••

additional governing bodies;voting and counting of votes of such governing bodies;amendment of a smart contract;
creation and management of treasury.

You can amend any of these matters by the members' decision in compliance with theprocedure prescribed in the previous version of the Operating Agreement.
Registering a Marshall Islands LLC for DAO
Here's what the process of establishing a legal wrapper for DAO on the Marshall Islands looks
like:
••

•

•

•

You start by clearly defining the name and purpose of your DAO. Once again, thepurpose of your DAO should indicate the non-profit element;
At least three founding members draft the Operating Agreement (you may amend theOperating Agreement at any time upon establishment of the company; therefore, it is acommon practice to use the template at the first stage to speed up the process);
The founding members should pass the KYC process with the local regulator. Apartfrom the founders, anyone who holds 10% or more governance rights over thecompany must pass the KYC process;
The founding members sign the drafted Operating Agreement, Certificate ofIncorporation, and Foreign Business Investment License form and file these documentswith the regulator;
If everything is alright with the documents, the regulator sends the Charter of thelimited liability company to the founders.

The above is a reference from Taras Zharan Web 3 Virtual Legal Officer.
https://legalnodes.com/article/marshall-islands-llc-as-a-dao-legal-wrapper

32. Financial Regulations on DAOs
2.1. Points to Consider
When structuring a DAO, one must consider the financial regulations and the legal formcharacteristics.
Here are several points to keep in mind:
1. Security regulation under the Financial Instrument and Exchange Act (“FIEA”) may apply
when tokens have the possibility of dividends or redemption of the principal of more than 100%
(dividends and redemption of the principal of more than 100% are from now on collectively
referred to as "dividends, etc."). As a general rule, token sales of such DAO must be conductedby a Type 1 Financial Instrument and Exchange Business Operator (“Type I license”) or byobtaining a Type 2 Financial Instrument Exchange Business Operator license (“Type II license”).
2. When selling Fungible Tokens without dividends, etc., it is necessary to have a Crypto Asset
Exchange Operator conduct the sale or to obtain a Crypto Asset Exchange Operator license.
In contrast, these financial regulations generally do not apply when selling NFTs withoutdividends, etc.
3. You also need to consider the tax benefits. If you want to pursue tax advantages in an
Investment DAO with dividends, etc., you can use a partnership or GK-TK scheme. If tax
advantages are not particularly important, an association without rights, a general incorporated
association, or a limited liability company can be considered a scheme to issue tokens. For theissuance of Fungible tokens or NFTs without dividends, etc., it may be better to have noparticular legal structure.

2.2. Reference Table of Conclusions
The table below summarizes the legal scheme and financial regulations that should be consideredin establishing a DAO.
The following regulations apply to token sales of Investment DAOs with dividends, etc.
(assuming dividends or principal redemption of more than 100%).
Type of Member’s
RightsForm underJapanese Law

Free distributionof Tokens

Token Sale

DAO member’s
rights as
shareholders’rights in Limited
Liability
Companies andTokenization ofshareholders’rights of limited
liability
companies, etc.

Free distributionof theshareholders'
rights is notallowed under

Sales by a third party
No regulation
for an issuer need aType I license. A TypeII license is necessary
for the self-offering of alimited liability

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Investment
Management

Joint-stock
Companies

corporate law,etc.

company. No license isrequired in the case ofself-offering of a jointstock company.
In the case ofsolicitation of 50 ormore people, there
needs to be a
submission of aregistration statement
regarding securities,etc.

DAO member’s
rights (withdividends), notincludingshareholders'
rightsTK investment,
partnershipinvestment,
tokenization ofrights that are
difficult toclassify into
prescribed legalforms, etc.

Unregulated

Sales by a third party
for an issuer need aType I license.
Self-offering needs a
Type II license.
In the case ofsolicitation of 50 ormore people, there
needs to be a
submission of aregistration statement
regarding securities,etc.

No regulation(Possibilityof Investment
Management
Business
license in thecase ofsecurities
investment)

On the other hand, a DAO without dividends, etc., is also possible. Its regulations are as follows:
Tokens/NFT

Free Token
Distribution

Sale of Tokens

Utility Tokens

No regulation

NFT

No regulation

Crypto Asset
Exchange Businessregulation
No regulation

Investment
Management(Assuming nodividend)
No regulation

No regulation

With respect to possible legal forms for DAOs, the following comparisons can be made:5Status

Legal Form

LimitedLiability

No Legal
Entity Status

Association
without rights+Tokens withunclear rights

DAO hasLegal Entity
StatusAvoid
DoubleTaxation×

Others, Comprehensive
Evaluation〇?

Is it possible
todistribute?
〇

Civil Law
Partnership +Partnership EquityToken×〇〇△~〇 High degree offreedom. A goodscheme if there is no
problem with limited
liability.

Investment
Business Limited
Liability
Partnership +partnership Equity
Token〇〇〇

× Although otherpoints are reasonable,
there are restrictions on
investment destinations
and businesses, such as
not being able topurchase NFTs. It's
usually hard to use thisscheme as DAO.

Limited Liability
Partnership +Partnership Equity
Token〇〇〇

× There are valid
points; however, to use
as a DAO isproblematic because of
the need to register thename of the union
member.

Corporation (*1) + 〇Tokenization ofAnonymous
Partnership (e.g.,TK-GK scheme)〇〇△ It is necessary tooperate in accordancewith the Companies
Act and the General
Incorporated
Associations Act. It
should be noted that
TK holders do not havethe right to instruction.
The good point is that
there is no double

6△~〇 High degree of
freedom. A goodscheme if there is noproblem with double
taxation.

taxation and limited
liability.
Corporation (*1) + 〇?
Token withunknown rights〇×Corporations (*1) 〇+ Tokenization ofshareholders rights(*2)

〇 (× For×generalincorporatedassociations)△ ~ 〇 It is necessary
to operate under theCompanies Act and theGeneral Incorporated
Associations Act.
Besides that, it has ahigh degree of freedom
and is a good scheme ifyou don't mind thedouble taxation
problem.
× Is there a low degreeof freedom due to theneed to operate per theCompanies Act and theGeneral Incorporated
Associations Act? For
example, it is necessary
to manage members as
shareholders.

*1 Legal entities include limited liability companies, stock companies, and general incorporated
associations. LLCs are generally easier to establish and operate than joint-stock companies. If
you want to have a more public image, use a general incorporated association.
*2 Membership rights of a limited liability company, stocks of a stock company, membershiprights of a general incorporated association.

2.3 Tokenization of Rights
Tokenization of rights of funds or partnership, where there is an investment of funds (including
money and crypto assets), investment management, dividends, or redemption of the principal ofmore than 100%, would be broadly considered a collective investment scheme (fund) underJapanese law. Below is the summary of the Definition of a Collective Investment Scheme.
Summary of Definition of Collective Investment Scheme
Rights that satisfy the following (i) to (iv)(i) Rights under a partnership agreement as defined in Article 667(1) of the Civil Code, a silent
partnership agreement as defined in Article 535 of the Commercial Code, an investment
limited partnership agreement as defined in Article 3(1) of the Act on Limited Liability
Partnership Agreement for Investment Business, or a limited liability partnership agreement as
defined in Article 3(1) of the Act on Limited Liability Partnership Agreement for Investment
7Business, incorporated association (i) Rights of members of a juridical person, and otherrights;(ii) The existence of a business (the "Invested Business") in which money (includingcryptographic assets) contributed or contributed by the person who has such rights (the"Investor") is allocated to the Invested Business;(iii) The investors are entitled to receive dividends of profit generated from the invested
business or distribution of assets related to the invested business;(iv) There are no exceptional circumstances, such as all investors being constantly involved in
the business.

The revised Financial Instruments and Exchange Act, which came into effect on May 1, 2020,
created the legal concept of Electronic Record Transfer Rights. The rights of tokenized collective
investment schemes usually fall under the Electronic Record Transfer Rights below.
Outline of Definition of Electronically Recorded Transfer Rights
Rights that satisfy the following (i) to (iii) but exclude (iv) (Article 2, Paragraph 3 of theFIEA):(i) Rights listed in each item of Article 2, Paragraph 2 of the FIEA (funds, trust beneficiaryrights, members' rights of general partnerships, limited partnerships, limited liability
partnerships, etc.);(ii) When they are expressed in property values that can be transferred through an electronic
data processing system;(iii) When recorded in electronic devices or other objects by electronic means;(iv) Cases provided in the Cabinet Office Ordinance have considered the nature of distribution
and other circumstances.
The sale of this electronic record transfer right requires a Type 1 Financial Business registration.
If soliciting more than 50 people, it will be a public offering (Article 2, Paragraph 3 of theFinancial Instruments and Exchange Act), and a securities registration statement must be
submitted based on Article 5 of the FIEA.
If the sale is limited to qualified institutional investors or wealthy people of 49 or less, and even
if there is resale, there are technical restrictions so that other people cannot become DAO token
holders.
When the Investment DAO is formed, it can be sold in such a limited form at first, and after it
grows, it can be sold to the general public while complying with increased regulations.
2.4 Tokenization of Company Membership Rights and Financial Registration
Regulations
Regarding tokenization of company membership rights, a Type I FIBO license is necessary whena third party sells the rights, and Type II is essential in the case of self-solicitation. In the case oftokenization of company membership rights (shareholders rights) of a joint stock company, a8

Type I license is necessary in the case of solicitation by a third party, and no license is requiredin the case of self-solicitation.
2.5 Regulations on Public Offerings, etc.
If any of the following applies, it becomes a public offering. In principle, it is necessary tosubmit a securities registration statement.
(i) When soliciting the acquisition of securities from 50 or more persons (excluding Qualified
Institutional Investors (QII) in the case there are restrictions on resale other than QII);(ii) When it does not fall under any of the following categories: Private Placement for QII,
Private Placement for Professional Investors, and Private Placement for Small Groups.
2.6 Financial Regulations for DAOs without Dividends
If DAOs have no dividends, etc., they are not considered securities, but different financial
regulations may apply.
Tokens/NFTsFree token distribution

Token Sales

Utility Tokens

Unregulated

NFTs

Unregulated

Crypto Asset
Exchange Business
LicenseUnregulated

CONTACT
So SaitoPartners.saito@innovationlaw.jp
Foreign Associate
Sergio Elias-Wilsons.wilson@innovationlaw.jp
Website9

Investment
Management(Assumption without
dividends)
Unregulated

Unregulatedhttps://innovationlaw.jp/en/

Disclaimer
The content of this article has not been confirmed by the relevant authorities or organizations
mentioned in the article but merely reflects a reasonable interpretation of their statements. Theinterpretation of the laws and regulations reflects our current understanding and may thereforechange in the future. This article does not recommend investment in DAO. This article provides
merely a summary for discussion purposes. If you need legal advice on a specific topic, pleasefeel free to contact us.

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