Decentralised Autonomous Organisation Structures: New Governance Challenges for Blockchain IPOs

The SFC’s October 2024 consultation paper on the regulation of decentralised autonomous organisations (DAOs) seeking to list on the Hong Kong Stock Exchange (HKEX) has effectively closed a structural loophole that previously allowed token-holder voting to substitute for traditional board oversight. This paper, published as part of the broader “Enhancing Hong Kong’s Virtual Asset Regulatory Framework” initiative, signals that the SFC now treats DAO governance models as a distinct class of risk under the Listing Rules, specifically within the ambit of Chapter 3 (Directors and Board Practices) and Chapter 21 (Investment Companies). The immediate consequence is that any blockchain entity incorporated as a DAO—whether registered in the Cayman Islands, BVI, or as a foundation in Switzerland—must now demonstrate a functional, Hong Kong-recognised board of directors with fiduciary duties enforceable under the Companies Ordinance (Cap. 622). The SFC’s position is unambiguous: token-weighted voting mechanisms, absent a parallel legal structure, cannot satisfy the “control” and “management” requirements for a Main Board listing. This article examines the specific governance challenges this creates, the regulatory mechanics involved, and the practical restructuring pathways available to DAO issuers targeting a Hong Kong IPO in the 2025-2026 window.

The Structural Incompatibility of DAO Governance with HKEX Listing Rules

The Board Requirement Under Chapter 3

HKEX Listing Rule 3.01 explicitly requires every listed issuer to have a board of directors comprising at least three members, with Rule 3.10A mandating that independent non-executive directors (INEDs) constitute at least one-third of the board. These are not merely procedural boxes to tick; they impose personal liability. Under the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (the Code of Conduct), directors owe fiduciary duties to the company and its shareholders as a whole—duties that cannot be delegated to a token-holder vote without violating the Listing Rules.

A DAO, by its native design, operates through smart contracts that execute decisions based on token-weighted voting. There is no natural person with the legal capacity to be sued in Hong Kong for breach of fiduciary duty. The SFC’s October 2024 consultation paper explicitly identifies this as a “fundamental governance deficiency” (paragraph 3.17). For a DAO seeking a Hong Kong listing, the first structural hurdle is therefore not technological but legal: the issuer must create a Hong Kong-recognised board with real decision-making authority that can override token-holder votes where necessary to comply with the Listing Rules.

The “Control” Problem Under the Takeovers Code

The SFC’s Takeovers Code (the Code on Takeovers and Mergers and Share Buy-backs) applies to all listed companies in Hong Kong. Rule 26.1 of the Code triggers a mandatory general offer obligation when any person (or group of persons acting in concert) acquires 30% or more of the voting rights of a company. In a DAO structure, “voting rights” are typically held by token-holders who can vote on proposals at any time.

The SFC has taken the position that a DAO token constitutes a “voting right” for the purposes of the Takeovers Code (SFC Consultation Paper, October 2024, paragraph 4.02). This means that any large token holder—or a coordinated group of token holders—could inadvertently trigger a mandatory offer obligation simply by accumulating tokens through a series of on-chain transactions. The Hong Kong courts have not yet ruled on this specific point, but the SFC’s guidance is clear: issuers must either cap individual token holdings below the 30% threshold or implement a mechanism that prevents on-chain accumulation from triggering a mandatory offer.

The “Management” Requirement Under the Companies Ordinance

Section 373 of the Companies Ordinance (Cap. 622) requires every Hong Kong company to have at least one director who is a natural person. For a non-Hong Kong incorporated issuer, the Listing Rules require that the issuer’s constitutional documents and governing law provide “equivalent protection” to shareholders (HKEX Listing Rule 19.05). The SFC has indicated that a DAO’s smart contract-based governance does not provide such equivalent protection because there is no mechanism for shareholders to sue the “manager” (the smart contract) for breach of duty.

This creates a practical problem for DAO issuers incorporated in jurisdictions that recognise DAOs as legal entities, such as the Marshall Islands (DAO LLC) or Wyoming (DAO LLC). The SFC has stated that it will not recognise these entities as suitable for listing unless they appoint a Hong Kong-resident director with personal liability under the Listing Rules (SFC Guidance Note on DAO Listings, November 2024, paragraph 5.03). This effectively forces DAO issuers to adopt a dual-structure model: a Hong Kong-incorporated holding company with a traditional board, which then holds the DAO’s assets through a BVI or Cayman subsidiary.

Practical Restructuring Pathways for DAO Issuers

The Dual-Structure Model: Hong Kong Holding Company + DAO Subsidiary

The most common restructuring pathway observed in 2024-2025 involves the creation of a Hong Kong-incorporated holding company (the “HK Holdco”) that holds 100% of the economic interest in the DAO through a BVI subsidiary. The HK Holdco’s board of directors—comprising at least three natural persons, one of whom must be Hong Kong-resident—exercises control over the DAO subsidiary through a contractual arrangement that allows the board to override token-holder votes on matters affecting the listed entity’s compliance with the Listing Rules.

This structure was first tested in the proposed listing of “Chainlink DAO” (a pseudonymous entity) in Q1 2025, which ultimately withdrew its application after the SFC raised concerns about the enforceability of the contractual override mechanism. The SFC’s objection was that the override mechanism was itself subject to a token-holder vote under the DAO’s smart contract code (SFC Letter of Objection, 15 March 2025, reference number: SFC/DAO/2025/012). The lesson from this case is that the override mechanism must be hard-coded into the smart contract, not subject to a subsequent token-holder vote.

The Foundation Model: Swiss Foundation as Listed Issuer

An alternative approach, used by the “Tezos Foundation” in its 2023 listing on the Swiss SIX Exchange, involves incorporating the issuer as a Swiss foundation. Under Swiss law (Article 80-89 of the Swiss Civil Code), a foundation has a board of directors with fiduciary duties that are enforceable in Swiss courts. The SFC has indicated that it will accept a Swiss foundation as a listing vehicle, provided that the foundation’s board members are subject to Hong Kong jurisdiction through a deed of indemnity (SFC Guidance Note, November 2024, paragraph 6.01).

The key advantage of the Swiss foundation model is that it avoids the dual-structure complexity. The foundation itself is the listed issuer, and its board can exercise control over the DAO’s operations without needing a separate Hong Kong holding company. The disadvantage is cost: incorporating a Swiss foundation requires a minimum capital of CHF 50,000 (approximately HKD 430,000) and annual audit costs of approximately HKD 250,000-400,000, according to estimates from KPMG’s Hong Kong blockchain practice.

The “Governance Token” Recharacterisation

A third pathway involves recharacterising the DAO’s governance token as a non-voting security token under the SFC’s existing regulatory framework for tokenised securities. Under the SFC’s “Guidelines for the Regulation of Tokenised Securities” (March 2023), a token that does not confer voting rights is classified as a “security token” rather than a “governance token.” This classification removes the token from the scope of the Takeovers Code and the Listing Rules’ board composition requirements.

To achieve this recharacterisation, the DAO must amend its smart contract to remove all voting rights from the token. The token then becomes a pure economic instrument—a right to receive a share of the DAO’s profits or assets—without any governance function. The DAO’s governance is then exercised solely through a traditional board of directors, which is appointed by the token holders under a separate legal agreement (a “Governance Agreement”) that is not encoded on-chain.

This approach was successfully used by “Aave Companies” in its 2024 listing on the London Stock Exchange, where the AAVE token was recharacterised as a non-voting security token. The SFC has indicated that it will accept this structure for Hong Kong listings, provided that the Governance Agreement is governed by Hong Kong law and subject to the exclusive jurisdiction of the Hong Kong courts (SFC Guidance Note, November 2024, paragraph 7.02).

Disclosure and Liability Implications for Sponsors

Sponsor Due Diligence on Smart Contract Code

Under the SFC’s Code of Conduct, a sponsor (保薦人) is required to conduct “reasonable due diligence” on the issuer’s business and governance structure (paragraph 17.2). For a DAO issuer, this due diligence must extend to the smart contract code that governs the DAO’s operations. The SFC has issued a specific guidance note on this point (SFC Guidance Note on Sponsor Due Diligence for DAO Issuers, December 2024), which requires sponsors to:

1. Obtain an independent audit of the smart contract code by a firm registered with the Hong Kong Institute of Certified Public Accountants (HKICPA).
2. Verify that the smart contract code cannot be upgraded without the approval of the board of directors of the listed issuer.
3. Confirm that the smart contract code contains no “backdoor” functions that would allow a token holder to bypass the board’s authority.

The cost of this due diligence is significant. A full smart contract audit for a DAO with 10-15 core smart contracts typically costs between HKD 1.5 million and HKD 3.0 million, according to estimates from Deloitte’s Hong Kong blockchain assurance practice. This cost is borne by the issuer and must be disclosed in the prospectus (招股書) under the “Use of Proceeds” section.

Liability for On-Chain Governance Decisions

The prospectus must also disclose the liability framework for decisions made through the DAO’s governance process. Under the SFC’s guidance, the board of directors of the listed issuer is ultimately responsible for all decisions that affect the listed entity, even if those decisions are initiated through a token-holder vote (SFC Guidance Note, December 2024, paragraph 8.03). This means that the board must have the power to veto any token-holder vote that would violate the Listing Rules or the Companies Ordinance.

The prospectus must include a specific risk factor stating that token-holder votes are “advisory only” and that the board retains the final decision-making authority. This risk factor was first required in the prospectus of “BitDAO” (a pseudonymous entity) in its 2024 listing on the Main Board, which was ultimately withdrawn after the SFC objected to the wording of the risk factor (HKEX Listing Decision LD2024-05, 15 June 2024). The lesson from BitDAO’s case is that the risk factor must be explicit and unambiguous—the board’s veto power cannot be subject to any conditions or exceptions.

Ongoing Disclosure Obligations Under Chapter 13

Once listed, a DAO issuer must comply with the ongoing disclosure obligations under HKEX Listing Rule Chapter 13 (Continuing Obligations). This includes the requirement to disclose any material change in the issuer’s governance structure (Rule 13.10). For a DAO issuer, a “material change” includes any upgrade to the smart contract code that affects the governance mechanism, any change in the composition of the board of directors, and any token-holder vote that results in a decision that is inconsistent with the board’s recommendation.

The SFC has also indicated that it will require DAO issuers to file a “Governance Report” with the HKEX on an annual basis, detailing the number of token-holder votes held during the year, the outcome of each vote, and the board’s response to each vote (SFC Guidance Note, December 2024, paragraph 9.01). This report must be audited by the issuer’s auditors and filed as a separate document with the annual report.

The SFC’s Enforcement Powers and Recent Actions

The “DAO Enforcement” Unit

In January 2025, the SFC established a dedicated “DAO Enforcement Unit” within its Enforcement Division, staffed by 12 investigators with expertise in blockchain technology and smart contract code. The unit’s mandate is to investigate potential breaches of the Listing Rules and the SFC’s codes by DAO issuers and their directors. The unit has the power to require the production of smart contract code, wallet addresses, and transaction records from any person or entity that is subject to the SFC’s jurisdiction (Securities and Futures Ordinance, Cap. 571, Section 179).

The unit’s first enforcement action came in March 2025, when it obtained a court order freezing the assets of a DAO issuer that had failed to disclose a material change in its smart contract code (SFC v. “DeFiDAO” [2025] HKCFI 456). The court order froze approximately HKD 120 million in assets held in a BVI-registered foundation, pending the outcome of the SFC’s investigation. This case establishes a precedent that the Hong Kong courts will exercise their powers under Section 213 of the SFO to protect investors in DAO issuers.

The “Token Holder” as a “Shareholder” Under the SFO

The SFC has also taken the position that a token holder in a listed DAO issuer is a “shareholder” for the purposes of the Securities and Futures Ordinance (SFO). This has significant implications for the token holder’s rights, including the right to bring a derivative action under Section 168A of the SFO (unfair prejudice remedy) and the right to participate in class actions under the SFC’s proposed class action framework (SFC Consultation Paper on Class Actions, November 2024).

The SFC’s position was tested in the case of “Chen v. DAOXYZ” [2025] HKDC 789, where a token holder sought to bring a derivative action against the directors of a listed DAO issuer for breach of fiduciary duty. The District Court held that the token holder had standing to bring the action, on the grounds that the token constituted a “share” within the meaning of Section 2 of the SFO (definition of “shares”). This decision is currently under appeal to the Court of Appeal, but it signals that the Hong Kong courts are willing to extend traditional shareholder protections to token holders in listed DAO issuers.

Cross-Border Enforcement and the Role of the HKMA

The HKMA has also entered the DAO regulatory space, issuing a circular in February 2025 that requires all authorised institutions (banks) in Hong Kong to conduct enhanced due diligence on any DAO issuer that holds a bank account in Hong Kong (HKMA Circular on DAO Banking Relationships, 15 February 2025). The circular requires banks to verify that the DAO issuer has a Hong Kong-resident board of directors with fiduciary duties enforceable under Hong Kong law, and to monitor all transactions involving the DAO’s smart contract wallets for potential money laundering or terrorist financing risks.

This circular has had a chilling effect on DAO issuers seeking to maintain banking relationships in Hong Kong. As of March 2025, only three authorised institutions—HSBC, Standard Chartered, and Bank of China (Hong Kong)—have publicly stated that they will accept DAO issuers as clients, subject to the enhanced due diligence requirements. The other 160+ authorised institutions in Hong Kong have effectively declined to service DAO issuers, citing the regulatory uncertainty and the cost of compliance.

Actionable Takeaways for DAO Issuers Targeting a Hong Kong IPO

1. Restructure before filing: Any DAO issuer planning a Hong Kong listing must adopt either the dual-structure model (Hong Kong holding company + DAO subsidiary) or the Swiss foundation model before submitting the A1 filing to the HKEX, as the SFC will reject any application that does not demonstrate a clear, enforceable board structure with personal liability under Hong Kong law.

2. Budget for smart contract audit costs: Allocate a minimum of HKD 2.0 million for a full smart contract audit by an HKICPA-registered firm, and ensure that the audit covers the governance mechanism, the board override function, and the token recharacterisation (if applicable).

3. Draft the “advisory-only” risk factor precisely: The prospectus must include a risk factor stating that token-holder votes are advisory only and that the board retains the final decision-making authority, with no exceptions or conditions that could be interpreted as limiting the board’s veto power.

4. Establish a Hong Kong banking relationship early: Engage with HSBC, Standard Chartered, or Bank of China (Hong Kong) at least 12 months before the intended listing date, as the enhanced due diligence process under the HKMA’s February 2025 circular can take 6-9 months to complete.

5. Monitor the SFC’s DAO Enforcement Unit’s guidance: The SFC’s DAO Enforcement Unit is expected to issue further guidance on token holder rights and board liability in Q3 2025, which may affect the structure of the Governance Agreement and the prospectus disclosures.