The legal frameworks for DAOs in Delaware

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DAO Legal Frameworks

The legally secure structure of DAO should be created for consumer protection and for unknown liability risk, as many consumers participate in the DAO. This has further encouraged the creation of a DAO legal framework. Mainly, there are four different options for setting up the DAO legal structure, including Wyoming DAO LLC and Delaware LLC in the United States of America, Cayman Island, and Switzerland.

In the real world, DAOs are represented as ‘legal wrappers’ for the external legal relationship and governance. These DAO legal wrappers are similar to a legal company having a legal structure in the form of b-corps, c-corps, LLCs, and DAO LAO. To resolve the DAO legal entity issues, the governance tokens are offshored to foreign jurisdictions, including the Cayman Islands, Switzerland, Singapore, Panama, and others. 

Further wrapping the DAO into a legal framework formed in such a jurisdiction. 

Additionally, it should be highlighted that a DAO Legal Wrapper must contain a section of the DAO to guarantee that it offers legal protection to its members and status legally binding to the decentralized governance system.

Formation of DAO as Delaware, LLC

Delaware LLC is an organizational form of business that is used for a variety of business purposes, including operating enterprises, holding companies, unique purpose entities, and specific transaction vehicles.

With the emergence of distributed ledgers and the growth of blockchain technology in commercial and corporate transactions, it has become an organizational form for distributed autonomous organizations as well. DAO could accrue the benefits of forming or establishing a legal entity in the jurisdiction of Delaware and LLC. The US state of Delaware has established a legal DAO as LAO(Legal DAO). This DAO legal structure allows members to invest in the decentralized platform in exchange for utility tokens. This legal structure is referred to as a DAO  ‘legal wrapper’, created by structuring DAO as an LLC to provide clarity on the applicable law, provide tax benefits, and limit the liability of the participants of such a system. Incorporating DAO in Delaware state provides much flexibility and a faster, cheaper process of incorporation. Moreover, it provides flexibility in choosing whether to make smart contracts public or private and to have on-chain operations freely and to make decisions that better align with the projects. Due to this, more and more projects have started to incorporate under Delaware LLC. Further, MetaCartel Ventures DAO LLC and The LAO have opted for legal status under the Delaware LLC Act.

Formation of DAO as Wyoming, LLC 

Wyoming Governor Mark Gordon signed Bill 38 in April 2021, which allowed Wyoming to recognize decentralized autonomous organizations (DAO) as legal entities, LLC (Limited Liability Companies). This came as an amendment to the already existing Wyoming Limited Liability Act. The new amendment in the law defines a DAO as an LLC, wherein the article of incorporation includes the statement that the company is a DAO. Subsequently, in July, DAOs to be formed as limited liability companies, i.e., DAO LLCs, became a law in the state of Wyoming in the US. This law also has been recognized in Europe and Germany due to the Treaty of Friendship, Commerce, and Navigation between the Federal Republic of Germany and the United States of America on October 29, 1954. 

As per the law, the decision-making in a DAO depends on the approval of more than fifty percent of the participating members in a vote participated by a quorum of 4 members. Further, the membership interest is determined as the member’s ownership share in the member-led DAO, which may be defined in the DAO’s smart contract or operating agreements. 

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Advocate Rahul Dev is a Patent Attorney & International Business Lawyer practicing Technology, Intellectual Property & Corporate Laws. He is reachable at rd (at) patentbusinesslawyer (dot) com & @rdpatentlawyer on Twitter.

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