Non-Profit Creation

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#1
Hi everyone,
We've completed our Non-profit + Foundation research. Please find the three documents attached. This is obviously a complex subject. As a refresher, we currently need the following properties to be held by an independent party (as opposed to an ANO):

1. FactomProtocol.org website (thanks DBGrow)
2. FactomProtocol.org domain name
3. Factomize (thank you David)
4. Any future trademarks/IP the community pursues (if any)

Recommended Jurisdiction is Wyoming because:
1. Lower compliance burden than other jurisdictions
2. No residency or membership requirement for board members. Board member maximum term: 5 years, default term: 1 year.
3. No membership is required for a nonprofit.
4. Liability Protections:
(i) Directors and officers are not deemed as trustees with respect to the nonprofit or with respect to any property held or administered by the nonprofit.
(ii) Directors and officers (who are not employees) are not individually liable for any actions, inactions or omissions by the nonprofit corporation (excluding liability for intentional torts or illegal acts.).
(iii) Unless limited by the articles of incorporation, a nonprofit is required by law to indemnify a director or an officer who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director or the officer was a party because he is or was a director or an officer of the nonprofit against reasonable expenses actually incurred by the director in connection with the proceeding.
(iv) A nonprofit can purchase insurance on behalf of directors and officers.
5. Wyoming already has friendly blockchain legislation in place. Cryptocurrencies are exempt from property taxation and from the Wyoming Money Transmitter Act (they are one of the most friendly states)
6. No corporate income tax (only applicable if we pursue a non-exempt nonprofit)
Estimated Setup Cost: $5,000-$10,000

Board of Directors will run the non-profit:
1. We will need to elect the initial board members (between 5-11). Board members should be a mix of standing parties. This can evolve overtime as we add more standing parties.
2. We will need to create the bylaws for the nonprofit. We can write into the bylaws that only the Factom community can change the bylaws.
3. The non-profit can be funded via the grant pool and/or ANO contributions
4. The community can select the initial directors. If we build-out standing parties enough, then standing parties can elect future directors. However, if we only have ANOs + Guides as standing parties at the time of the second board of directors election, then the future directors will be elected by the then-current board (this is essential to avoid the nonprofit becoming a centralized entity controlled by the ANOs and the Guides as a group). HOWEVER, we can write in the bylaws that the board will have to consider certain set of factors or use certain mechanism to ensure the Factom community is well-represented. For example, the board can be required to form a committee to hold a vote in the community to elect a pool of candidates, and then the board can vote to select next directors from the pool (the directors are essentially selected by the community, but this way, we can avoid granting "standing parties" voting rights in the governance of the nonprofit. The votes are basically conducted to investigate the community wishes to make sure the board composition reflects the community's wishes.)
 

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#2
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#3
Thank you everyone who worked on this.

A few questions -

Recommended Jurisdiction is Wyoming
Other than UK & Switzerland, curious to know if any other jurisdictions were investigated?

6. No corporate income tax (only applicable if we pursue a non-exempt nonprofit)
Should it read exempt non-profit instead?

Will Wyoming be flexible enough to allow tax-free funding from the grant pool without too much complexity and do we have an opinion from an accountant or tax professional?

Estimated Setup Cost: $5,000-$10,000
Do you have an estimate for maintenance costs?

1. We will need to elect the initial board members (between 5-11).
Does Wyoming stipulate this as a hard requirement? What exactly can our bylaws dictate and what is a requirement from the State?

Again, thanks for the hard work :)
 
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#4
First off, thank you to the Legal Working Group for all their hard work. I know you all put a lot of time into this.

I am personally comfortable with Wyoming as a jurisdiction and have been very impressed with their taking a leading role with blockchain law.

Board of Directors will run the non-profit:
1. We will need to elect the initial board members (between 5-11). Board members should be a mix of standing parties. This can evolve overtime as we add more standing parties.
2. We will need to create the bylaws for the nonprofit. We can write into the bylaws that only the Factom community can change the bylaws.
3. The non-profit can be funded via the grant pool and/or ANO contributions
4. The community can select the initial directors. If we build-out standing parties enough, then standing parties can elect future directors. However, if we only have ANOs + Guides as standing parties at the time of the second board of directors election, then the future directors will be elected by the then-current board (this is essential to avoid the nonprofit becoming a centralized entity controlled by the ANOs and the Guides as a group). HOWEVER, we can write in the bylaws that the board will have to consider certain set of factors or use certain mechanism to ensure the Factom community is well-represented. For example, the board can be required to form a committee to hold a vote in the community to elect a pool of candidates, and then the board can vote to select next directors from the pool (the directors are essentially selected by the community, but this way, we can avoid granting "standing parties" voting rights in the governance of the nonprofit. The votes are basically conducted to investigate the community wishes to make sure the board composition reflects the community's wishes.)
While only four points, this is where I suspect a massive amount of discussion is going to need to take place.

1. How powerful do you see these directors being? Traditionally in non profits, the directors guide governance and financial management policies. Is that what we want? They also usually hire and set the pay rate for their CEO. Do we want that?

The development of a problematic governance policy or the hiring of a certain CEO could cause discontent within and external to the protocol ecosystem. How much, if any oversight do we want as Standing Parties?

2. The bylaws are going to have to be ironclad and very detailed. So many things will need to be worked out. A very quick example
:
A. Who is in charge of the content for the website? People the CEO hires? An existing committee? A new committee? Or?

B. Who has access to and administers the server and related hardware/software? People the CEO hires? An existing committee? A new committee? Or?

C. Who decides if a new web property that wants to be under the non profit umbrella should be? Directors? CEO? Standing Parties? Or?

D. Who determines trademark / IP policy? Directors? CEO? Standing Parties? Or?

E. If a Director loses their Standing Party status, do they stay a Director?

F. We're going to need a good conflict of interest statement.

G. We'll need to properly codify for annual meetings, regular meetings, and special meetings and who should be allowed to attend.

H. For the board of Directors we're going to need to define terms (if any), qualifications, and various meetings for them. Then of course compensation (if any) and probably a bunch of other things that aren't coming to mind right now.

3. This aspect shouldn't be too difficult.

4. Four is likely covered by the bylaw writing process.
 
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#5
Hey @Benjamin Dufty
Thanks for the questions. Apologies for the slow response. All questions are run by the lawyers before I respond for obvious reasons.

Other than UK & Switzerland, curious to know if any other jurisdictions were investigated?
Off the top of my head since it was a while ago, no. It takes a lot of time to research jurisdictions, which means it takes a lot of money :)
We did, however, research a bunch of foundations (e.g., zcash) in the crypto industry to see if we should expand our search to areas outside the UK, Switzerland, and USA. We didn't find anything that suggested it was worth the time and money.

Should it read exempt non-profit instead?
It was intended to mean a nonprofit that is not exempt from federal and state income taxation.

Will Wyoming be flexible enough to allow tax-free funding from the grant pool without too much complexity and do we have an opinion from an accountant or tax professional?
Wyoming imposes no corporate income tax. The funding from the grant pool to the nonprofit will be tax free at the state level regardless of the exempt status of the entity. If the nonprofit is not exempt from the federal income tax, then it will have to deal with the federal income tax. We did not have an opinion from an accountant but will engage an attorney licensed in the Wyoming to set up the nonprofit properly and will consult about the tax issues as well.

Do you have an estimate for maintenance costs?
The annual report that the nonprofit will need to file is $25.
We will need to use a registered agent in WY which will cost $50 - $150 per year.
The major cost would be professional fees (attorney fees + accountant fees), which I don't have a range. The professional fees for an exempt nonprofit will be higher than a nonprofit that is not exempt from income tax. These fees *should* be lower than the non-profit startup/creation cost of 5K-10K.

Does Wyoming stipulate this as a hard requirement? What exactly can our bylaws dictate and what is a requirement from the State?
The minimum number of directors for a nonprofit is 3 under the Wyoming Nonprofit Corporation Act. Bylaws are basically the governance document of the nonprofit. It can contain any provision for regulating and managing the affairs of the nonprofit as long as it is not inconsistent with the law or the nonprofit's articles of incorporation. It can dictate a broad range of matters such as:
(i) matters related to the BOD - board composition, director qualifications, director election, removal, and vacancy, term of director, director compensation, board meetings, how business of the nonprofit is managed
(ii) matters related to officers (election, removal, compensation, etc.)
(iii) committees of the nonprofit
(iv) amendment procedures
(v) indemnifications
(vi) books and records
(vii) etc.
 
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#6
1. How powerful do you see these directors being? Traditionally in non profits, the directors guide governance and financial management policies. Is that what we want? They also usually hire and set the pay rate for their CEO. Do we want that?

The development of a problematic governance policy or the hiring of a certain CEO could cause discontent within and external to the protocol ecosystem. How much, if any oversight do we want as Standing Parties?
Directors are the representatives of the standing parties. Traditionally, the board guides governance and financial management policies, but the Factom community can set these policies in the bylaws. The nonprofit will be a centralized entity regardless of how the board composition represents standing parties' interests, and as such, we should only use the nonprofit for the matters that absolutely need an entity to house (e.g., the website). Anything that can be managed outside of the foundation structure should stay out of the non-profit. If the matter to be managed by the nonprofit is limited, then we will be able to decide how exactly each matter should be managed and then put the managing mechanism in the bylaws. We do not believe we need to hire a CEO, but we do need certain officers (president, treasurer, secretary) per the requirements under the WY law, but these positions can be held by the same person. The officers should not be compensated because of the limited scope of the activities the nonprofit will conduct. But this should change if the day-to-day operation becomes too demanding.

2. The bylaws are going to have to be ironclad and very detailed. So many things will need to be worked out.
Agreed. What we can do is to list the things that the nonprofit will manage and brainstorm the managing methods for each matter and then put them in the bylaws, and then add a catch all clause that any matter not prescribed thereunder will need approval from the standing parties, which can be done through nonprofit committees.

A. Who is in charge of the content for the website? People the CEO hires? An existing committee? A new committee? Or?

B. Who has access to and administers the server and related hardware/software? People the CEO hires? An existing committee? A new committee? Or?
Managing mechanism can be flexible. Using committees (existing or new) sounds reasonable, but we should also explore other options. We can build in the checks and balances in the bylaws.

C. Who decides if a new web property that wants to be under the non profit umbrella should be? Directors? CEO? Standing Parties? Or?
The new property is not subject to the board control if it is not under nonprofit. The property owner can negotiate with the board the managing terms if the property owner wants to move the property to the nonprofit.

D. Who determines trademark / IP policy? Directors? CEO? Standing Parties? Or?
Standing parties through nonprofit committees.

E. If a Director loses their Standing Party status, do they stay a Director?
It's up to the community to impose any qualification or limitation on the directors.

F. We're going to need a good conflict of interest statement.

G. We'll need to properly codify for annual meetings, regular meetings, and special meetings and who should be allowed to attend.

H. For the board of Directors we're going to need to define terms (if any), qualifications, and various meetings for them. Then of course compensation (if any) and probably a bunch of other things that aren't coming to mind right now.
Yes

Once we are comfortable with the idea forming the nonprofit in WY, we can discuss the bylaws in detail.

"Wyoming nonprofit corporation act" attached for people's reading please
 

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#12
@Matt Osborne What is the intended output of this discussion? Are you expecting us to approve the recommendations? Approve the creation in Wyoming? Suggest directors?
@Ben Jeater My intentions are to just make sure that the non-profit conversation didn't slip by the wayside with everything else going on and that people have had ample time to ask questions, discuss, etc. before moving to a vote. I wanted to avoid the scenario of announcing a vote and then having people say, "Wait, we didn't have a chance to read up and discuss this." Just being thorough :)
 
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#13
What process do you see Matt? For example:

Vote 1 - Create a non profit in Wyoming? [Yes] [No] [Abstain]

Some time later.

Vote 2 - Here are the bylaws the group community created. Accept them for the non profit? [Yes] [No] [Abstain]

Some time later.

Vote 3 - Here are the potential directors. Choose as many as you want. [names]

Also, does the Legal Working Group see any potential issues if there is a rebrand somewhere down the line?
 
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#14
Could we go back to the roots of this discussion?

It has been so long since we first started discussing it that I would like to have the following question answered:

Why do we need (and want) a foundation in the first place? Is the intention for it to solely be for handling trademarks and play no part in official governance?
 
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#15
Also, does the Legal Working Group see any potential issues if there is a rebrand somewhere down the line?
Not a big deal. We are able to amend the articles of incorporation to change the name later.

Note: The paperwork for amending the name is attached if anyone is curious.

What process do you see Matt? For example:

Vote 1 - Create a non profit in Wyoming? [Yes] [No] [Abstain]

Some time later.

Vote 2 - Here are the bylaws the group community created. Accept them for the non profit? [Yes] [No] [Abstain]

Some time later.

Vote 3 - Here are the potential directors. Choose as many as you want. [names]
Step 1: Vote on whether to create a non-profit in Wyoming.
Step 2: Bylaws discussion: The "Legal Research Working Group" can provide a framework from which the community can build off of. The community can then discuss, amend, add/subtract bylaws
Step 3: Once we are putting the finishing touches on the bylaws, we can begin the process of choosing potential directors.
Step 4: Vote to approve bylaws
Step 5: Vote to approve Directors

The process will closely resemble the above.
 

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#16
Could we go back to the roots of this discussion?

It has been so long since we first started discussing it that I would like to have the following question answered:

Why do we need (and want) a foundation in the first place? Is the intention for it to solely be for handling trademarks and play no part in official governance?
The Factom (R) Protocol is based-off a decentralized model. With that being said though, there are times when we will need a legal entity to hold important assets on behalf of the community. Examples include:
1. FactomProtocol.org website
2. FactomProtocol.org domain name
3. Factomize Forum
4. Any future trademarks/IP the community pursues

Currently, a single ANO holds each of the above. That's not ideal, as it posses a risk to the Factom (R) Protocol project. Therefore, it's in the community's best interest if we create a legal entity to house crucial assets to our project

The Non-Profit will play no part in Governance. The Non-Profits bylaws will be 100% dictated by the standing parties.
 
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#17
Hi Matt,

Thank you to you and the team for what has obviously been a lot of difficult and detailed work.

Thank you too for drawing a conclusion and recommending Wyoming as the jurisdiction for the non-profit/foundation.

As I best understand it we need a non-profit/foundation to be an entity controlled by the community, as opposed to any individual ANO, which will enact certain functions which would normally be centralised. In particular it will “transfer” certain obligations and responsibilities from Facom Inc. (BTW I wrote this prior to the last post!)

Some of these have been listed, we need to be sure that the list is both comprehensive yet simple. Isn’t the biggest risk here that we create a layer of bureaucracy with it’s attendant problems.

At it’s simplest do we not want an entity that enacts what the community wants/needs? The community sustainably funds it through grants and the Foundation makes it happen.

Finally with respect to tax liability, most jurisdictions, as far as I am aware, only tax profit, ergo we should have no tax but will need to manage the finances well and to this end. I support getting an accountants perspective on this.
 
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#19
Matt, do you feel trademark / IP would cover the ability of the non profit to enter into licensing agreements on behalf of the protocol that extend to ANOs / Core Devs / etc? And do we want the non profit to have that ability when directed by the Standing Parties (I think yes).
Hi David, I know you directed this to Matt, so sorry for butting in. At the execution level , yes I agree. However shouldn't the decision making should be down to the community?
 
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#20
Hi David, At the execution level , yes I agree. However shouldn't the decision making should be down to the community?
In my opinion the non profit should only be steered by the Standing Parties. The more Standing Parties the better, but only those who have a stake in the success of the protocol should steer it to reduce the potential for gaming.

By the way, please butt in anytime :) I don't even consider it butting it; the more debate and discussion we have, the better!
 
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#21
Hi @Mike Buckingham

As I best understand it we need a non-profit/foundation to be an entity controlled by the community, as opposed to any individual ANO, which will enact certain functions which would normally be centralised. In particular it will “transfer” certain obligations and responsibilities from Facom Inc. (BTW I wrote this prior to the last post!)
Nothing from Factom Inc would be transferred at this time. But yes, certain assets held by a single ANO would be transferred to an entity that is 100% managed by the standing parties.

Some of these have been listed, we need to be sure that the list is both comprehensive yet simple. Isn’t the biggest risk here that we create a layer of bureaucracy with it’s attendant problems.
100% agree. I think the entire community feels this way also.

Finally with respect to tax liability, most jurisdictions, as far as I am aware, only tax profit, ergo we should have no tax but will need to manage the finances well and to this end. I support getting an accountants perspective on this.
Fortunately, the tax situation is pretty cut-and-dry for what we are trying to do. Also fortunately, we have access to a few CPAs :). We'll be 100% thorough.
 
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#22
Matt, do you feel trademark / IP would cover the ability of the non profit to enter into licensing agreements on behalf of the protocol that extend to ANOs / Core Devs / etc?
The nonprofit should have a trademark/IP policy in place. The policy can be drafted and approved by the standing parties.

And do we want the non profit to have that ability when directed by the Standing Parties (I think yes).
The standing parties will direct how the non-profit operates, so it is up to the standing parties (this is the single-most important takeaway regarding how the non-profit will operate).
 
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#23
@Tor Paulsen To add to what @Matt Osborne said, we also originally envisioned the foundation to take a role in coordinating marketing, and possibly even hiring protocol developers, that will be something for the community to decide how large any foundation should become, or if that should be separate entities.

Possibly the largest issue in my mind now is what we are seeing in situation like the factomprotocol website. We can turn that into a fantastic lead funnel, but DBGrow can't own that funnel. Trying to decentralize that process to committees then causes its own set of legal issues as I have seen the past couple weeks. We need a separate entity to own that process.