What Is The Proper Business Structure For A Decentralized Autonomous Organization (“DAO”)
Crypto has created a normalcy within the concept of decoupling governance rights from financial rights. Decoupling control and governance rights from economic participation is being accomplished by cooperatives, which perhaps is not so common in the US, but is readily available in other countries. For example, dual class shares with differential voting weights are quite popular with tightly held lineage conglomerates in Asia.
In the US, for better, or for worse we have overarching federal laws, which create structure and individual state laws which provide additional clarity. The US recognizes the truely novel part of crypto, one novelty being that it can can be inputted into solidity (and others) via code.
In regards to DAOs in the US there are 3 groups: 1) the C-Corp groups; 2) the Limited Liability Company (LLC) groups; and 3) the groups that rely on decentralization to avoid classification. Although I do not recommend option “3”, i do think that “1” and “2” are viable and will become more and more viable overtime. I also think you will see the US adopt new classifications along the lines of cooperatives and use the precedent from other countries to support blockchain initiatives.
A DAO, or decentralized autonomous organization, is a business structure where control is spread out rather than hierarchical. DAOs are organized using smart contracts, with participants using governance tokens to vote on topics such as fund allocation. Despite this autonomy, there are still some actions a DAO cannot complete autonomously; HINT HINT legal actions.
The perfect structure for a DAO is unknown, but we should relish in the possibilities. Currently the US is headed in the direction of DAO LLCs. In April 2021, Wyoming Governor Mark Gordon signed Bill 38. This bill recognizes DAOs as LLCs, and will take effect on July 1, 2021. The new law defines DAOs as limited liability companies whose articles of organization contain a provision that the company is a decentralized autonomous organization. It has always been intended for DAOs to be neither a corporation, nor any other type of existing legal personality, I wouldn’t be surprized if there was some irony in the form of conformity.
If a DAO is interested in reworking the bonding curve to support subDAOs (token-token conversion), a SeriesLLC may be applicable. I typically only see Series LLCs in real estate, where there are multiple individual properties and franchises where the same company owns multiple franchises. It is unclear whether a Series LLC is really meant for DAOs, but utilizing a Series LLC and any legal challenge thereto would be novel and uncharted, which is awesome and necessary.
Currently, Wyoming is the only state where it makes sense to create a DAO as a distinct legal entity, with the same legal protections as any other LLC. A DAO LLC may technically still be an LLC, but the operations of the two vary drastically in practice. If you are involved in forming a DAO, your next natural step once you’ve solidified your rules and funding is to start the process of forming your DAO LLC. The LLC could protect you and all the other stakeholders should the DAO become subject to a legal dispute.
DAOs may have the ability to transform corporate governance, and it’s entirely possible that companies could be overseen by DAOs instead of a board of directors.
Whether you decide on a C-Corp or an LLC, at a minimum, the entity will need to (1) register/file with a state Secretary of State’s office, Corporations Department or the like, (2) pay a fee, (3) file a certificate of incorporation/formation or some other filing that legally creates the entity. In addition to formation documents, you may have separate by-laws, a shareholders agreement or a similar governance document depending on the formation chosen.
With the advantages of DAO innovation also come some growing pains, namely those of security flaws and the potential for regulatory hurdles. What happens next requires a lawyer. If you, or someone you know Is interested in forming a DAO, my law firm is here to help