Billionaire Mark Cuban called Decentralized Autonomous Organizations (DAOs) “the ultimate combination of capitalism and progressivism.”[1] Indeed DAO’s are an exciting new potential ownership and operating structure that has the potential to revolutionize how companies form, operate, and distribute profits. However, the legal framework that would govern DAOs as legal entities may not be compatible with current US entity structuring.
DAOs are a new type of organization that consists of a collaboration of people trying to accomplish a specific goal whose ownership, management, and control are predetermined by rules coded into a blockchain. While corporations are organized based on the laws of various jurisdictions and require human involvement in their governance, the governance of a DAO is predetermined based on a set of protocols that are set up and executed on its blockchain. This allows an organization to operate without a central governing authority and incentivize its members to collaborate with each other to deliver on their objective without administrative bloat.
One of the legal challenges DAOs face is that there may not be an appropriate U.S. entity structure that allows them to enter a contract, pay taxes, or limit the liability of their members the way traditional corporate structures do. DAOs have long wrestled with their legal identity, and the specific legal status of this type of business organization is largely unclear.[2]
In July of this year Wyoming became the first state to officially recognize DAOs as legal entities.[3] The Wyoming Decentralized Autonomous Organization Supplement applies only to DAOs organized as Wyoming limited liability companies.[4] DAOs that are formed as limited liability companies in states other than Wyoming will not be authorized to do business within the state of Wyoming.[5] Wyoming’s recognition of DAOs will likely encourage other states to enact similar laws in order to attract these companies and the investments they would bring to their jurisdictions.
Last week, Miles Jennings, Crypto General Counsel at Andreessen Horowitz, in a series of Tweets, went through several of the problems that DAOs encounter and proposed a suggestion that may help DAO’s operate within an already existing Legal framework.[6]
Jennings addressed the Wyoming DAO law and suggested that even though it is specifically tailored to DAOs, the unique characteristics of DAOs will still “significantly limit the utility” of those structures.[7] He stated that “the need to protect privacy, the inability to obtain legal consent of members to form a legal entity and the need to avoid corporate formalities incongruent with decentralization all make these traditional structures unworkable for most DAOs.”[8]
Jennings advanced a potential solution, that DAOs should register as Unincorporated Nonprofit Associations (UNAs) in jurisdictions that recognize those entities. He states that UNAs “have unique characteristics that are well suited for DAOs, including simple formation and flexible governance requirements capable of being satisfied and scaled without jeopardizing any of the innovative benefits that DAOs make possible.”[9] Importantly, in many jurisdictions UNAs have the fictional personhood similar to that of a corporation, a separate legal entity from its members that provides important liability protection.
Although it would appear that DAOs would not qualify as “non-profit,” many potentially could. Jennings used the example of a Homeowners Association (HOA) in relation to real estate appreciation. Just because a HOA’s actions increase members’ home values doesn’t make it a for-profit enterprise. Jennings argued that the same could be said of DAOs regarding their benefit to its members and their tokens. Jennings further suggested that by adopting more flexible and permissive UNA statutes the United States could increase these benefits and “establish the US as the DAO capital of the world.”[10]
Future legislation could follow many paths, and whether DAOs will exist within the current legal framework or will necessitate a new species of corporate governance remains to be seen.
[1] https://twitter.com/mcuban/status/1399498072623927301
[2] Wright, A; De Filippi, P. (10 March 2015). "Decentralized Blockchain Technology and the Rise of Lex Cryptographia".
[3] https://finance.yahoo.com/news/wyoming-becomes-first-us-state-143455445.html
[4] WS §17-31-101 et seq.
[5] Id.
[6] https://twitter.com/milesjennings/status/1453080226179608577
[7] Id.
[8] https://twitter.com/milesjennings/status/1453080235910438915
[9] https://twitter.com/milesjennings/status/1453080238959648768
[10] https://twitter.com/milesjennings/status/1453080245393772545