J Markezic and M Bacina
Jun 5, 20223 min
A recent paper published by Chris Brummer of Georgetown University and Paradigm, and Rodrigo Seira of Paradigm has offered the first comprehensive overview and explanation of the legal wrappers that are available to Decentralised Autonomous Organisations (DAOs). The paper looks to the qualitative features of DAOs, specifically focussing on their dispersed and fluid memberships and blockchain-based governance.
The paper argues that more is needed to establish a DAO than mere coding. The paper argues that in order to establish a DAO, founders must engage in:
thoughtful legal engineering to enable the DAO to operate in the real world and protect builders and contributors.
Brummer and Seira note that many DAOs choose to launch without any legal wrapper, and although this is not strictly speaking contrary to any regulations, it exposes the DAO to several legal consequences. Choosing to launch a DAO without a legal wrapper, the paper argues, exposes the DAO to complications when hiring employees, contracting with service providers, opening bank accounts and meeting their tax obligations.
The paper argues that whilst corporate structures negate the decentralised and democratic purpose of DAOs, DAOs are able to utilise corporate wrappers for discrete parts of their overall legal structure. Brummer and Seira note that DAOs have traditionally tended to create sub-DAOs - or groups focussed on specific projects. Brummer and Seira also argue that employing a corporate wrapper assists the DAO in corporate fundraising and subsequently meeting the obligations placed upon them by regulation.
The paper continues by looking at how limited liability companies may assist as a legal wrapper. Brummer and Seira note that the limited liability company is able to avoid double taxation as well as offering the same liability shield available to corporation wrappers. Importantly, the paper notes that DAOs may benefit from a limited liability company wrapper as they are, in many ways, built for decentralised governance:
In contrast to corporations, which require boards of directors and centralized management that are afforded discretion to make the day-to-day operational decision of the company, LLCs can be run by a board of directors like a corporation (a “manager managed LLC”) or they can enable all owners of the business to participate equally in the management (a “member managed LLC”).
Consideration is further given to DAO LLCs under Wyoming state legislation, allowing the DAO to be algorithmically managed and able to defer many functions to its smart contract, and have its results prevail in the event of a conflict with its articles for organisation.
The paper then turns to overlooked not-for-profit wrappers available under US state laws, including Unincorporated Nonprofit Associations, Limited Cooperative Associations as well as Cayman Foundation Company and Guernsey Special Purpose Trusts.
The paper argues that not only do not-for-profit legal wrappers offer DAOs protection from liability, but also offer the prospect of tax exempt status for donations they receive or even the ability for donors to deduct their donations from their federal and state income tax returns. Brummer and Seira note that private foundations and public charities are the most visible and familiar not-for-profit wrappers and look to the procedural requirements for establishing these types of entities.
The paper also looks to the Unincorporated Nonprofit Association (UNA) - which in many ways is similar to an unincorporated association under New South Wales legislation - which is not required to make any state filing in order for formation, and can arise from general oral agreement between participants.
The paper then concludes with a variety of fact scenarios and hypotheticals to illustrate how legal wrappers might be employed with protocol, media, collector, social and philanthropic DAOs. Brummer and Seira draw upon the examples of Protocol, Social, Investment and Venture, Collector, Media , Philanthropic, and Lobby DAOs. Brummer and Seira conclude with the following insight into where DAOs ought to turn their minds to when considering potential legal wrappers and consequences:
The coming work for researchers, regulators and venture professionals will be to think through how the existing universe of wrappers, and new legal tools, can better fit the features of DAOs in ways that serve the people that use and depend on them, and the broader public.