DAO

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.

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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.

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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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Our team of advanced patent attorneys assists clients with patent searches, drafting patent applications, and patent (intellectual property) agreements, including licensing and non-disclosure agreements.

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.

Quoted in and contributed to 50+ national & international publications (Bloomberg, FirstPost, SwissInfo, Outlook Money, Yahoo News, Times of India, Economic Times, Business Standard, Quartz, Global Legal Post, International Bar Association, LawAsia, BioSpectrum Asia, Digital News Asia, e27, Leaders Speak, Entrepreneur India, VCCircle, AutoTech).

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Working closely with patent attorneys along with international law firms with significant experience with lawyers in Asia Pacific providing services to clients in US and Europe. Flagship services include international patent and trademark filings, patent services in India and global patent consulting services.

Global Blockchain Lawyers (www.GlobalBlockchainLawyers.com) is a digital platform to discuss legal issues, latest technology and legal developments, and applicable laws in the dynamic field of Digital Currency, Blockchain, Bitcoin, Cryptocurrency and raising capital through the sale of tokens or coins (ICO or Initial Coin Offerings).

Blockchain ecosystem in India is evolving at a rapid pace and a proactive legal approach is required by blockchain lawyers in India to understand the complex nature of applicable laws and regulations.

Explaining The Decentralized Autonomous Organization (DAO)

Business and Technology Updates

Introduction 

A decentralized autonomous organization (DAO) is an emerging form of legal structure. With no central governing body, every member of a DAO typically shares a common goal and strives to act in the best interests of the entity. DAOs, which have gained popularity among cryptocurrency and blockchain technology enthusiasts, make decisions with a bottom-up management approach.

Therefore, there are various legal frameworks in different jurisdictions all over the world for the smooth operation of the DAO through, DAO members, voting system, proposal, and decision-making. 

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What is the purpose of a DAO?

DAO stands for Decentralized Autonomous Organization, which operates transparently and autonomously, meaning independent of any human intervention. These organizations have their rules and structure written in codes known as smart contracts and do not have a hierarchical system, meaning no single commanding body behind decision-making. Decisions are made via a voting system on proposals during a specified period by those who have invested in these organizations or through algorithms depending on the type of DAO. These organizations are collectively owned and managed by their members only. DAO ownership is attained by selling tokens to the investors provided by the platform in exchange for virtual currency used on the blockchain on which the DAO code has been deployed. This provides voting rights to the token holders to accept or reject a smart contract-based business proposal. However, the legal status of DAOs is still uncertain. Despite the growth of the decentralized autonomous organization, the legal status has become a hurdle in its technological advancement and exposes risk to its members. 

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Formation of DAO

The organization was launched on April 30, 2016, after the Ethereum protocol engineer, Christoph Jentzsch, released the open source for an Ethereum-based investment organization. It was first meant to operate as a venture capital fund for crypto and decentralized spaces. DAO, called earlier ‘The DAO,” was a decentralized platform that relied on crowdfunding through token selling. Those who bought these tokens became token investors and decision-makers. The idea behind DAO is to form an automated, decentralized platform wherein decision makers are the members of that platform, and decisions are taken collectively without the interference of a centralized governing authority. 

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The general structure of DAO 

There are two stages for DAO; one is the Pre-DAO stage, and the other is the Post-DAO stage. DAO, initially in its pre-DAO stage, is a centralized project that is managed by its founders. Further, smart contracts are launched, tokens are issued, the members of the DAO are selected, the governance system is formed, and the DAO then enters the Post-DAO stage that fully decentralizes the ownership and the management.

The structure of the DAO includes a DAO governance system, a DAO constitution, DAO membership, a DAO voting rights system, and a decision-making process.

DAO members

The selection of members of the Decentralized Autonomous Organization is decided by the founders. They usually rely on a single criterion wherein a minimum limit of tokens is decided that a token holder possesses to become a member of DAO. However, there are other criteria to decide upon, such as the members of DAO, wherein those participants are welcomed who are contributors and play an important role in its work, such as validators, oracles, or creators, for example.

Voting Rights 

Once the members of the Decentralized Autonomous Organization are decided, the founders then structure the voting right mechanism that allows participants in the decentralized governance system of a Web3 decentralized project. The founders issue Liquidity Provider tokens to all the members of DAO as proof of the number of the project’s tokens staked by a DAO member. However, in other cases, founders may issue a separate type of governance token. These tokens must be non-transferable and non-tradable; otherwise, they will be considered securities.

Proposal making

Once the members and their voting rights are decided, subsequently, the founders determine which of the Decentralized Autonomous Organization members will have the right to create proposals and how many members must support it to put it to a vote of the entire DAO.

Decision making

The members of the DAO then participate in the decision-making by deploying their voting rights. These decisions include the issuance of additional tokens, burning of tokens, increasing liquidity pools, disposing of the treasury, and the like.

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In summary

Decentralized Autonomous Organizations are internet-native organizations that are owned and managed collectively by their members. They have built-in treasuries that can only be accessed with the permission of their members. Decisions are made through proposals that the group votes on over a set period.

DAOs are a highly effective and extremely safe way to collaborate with like-minded people all over the world.  DAOs, as internet-native organizations, have the potential to completely transform corporate governance. As the concept matures, more organizations may choose to use a DAO model to help govern their activities.

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Our team of advanced patent attorneys assists clients with patent searches, drafting patent applications, and patent (intellectual property) agreements, including licensing and non-disclosure agreements.

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.

Quoted in and contributed to 50+ national & international publications (Bloomberg, FirstPost, SwissInfo, Outlook Money, Yahoo News, Times of India, Economic Times, Business Standard, Quartz, Global Legal Post, International Bar Association, LawAsia, BioSpectrum Asia, Digital News Asia, e27, Leaders Speak, Entrepreneur India, VCCircle, AutoTech).

Regularly invited to speak at international & national platforms (conferences, TV channels, seminars, corporate trainings, government workshops) on technology, patents, business strategy, legal developments, leadership & management.

Working closely with patent attorneys along with international law firms with significant experience with lawyers in Asia Pacific providing services to clients in US and Europe. Flagship services include international patent and trademark filings, patent services in India and global patent consulting services.

Global Blockchain Lawyers (www.GlobalBlockchainLawyers.com) is a digital platform to discuss legal issues, latest technology and legal developments, and applicable laws in the dynamic field of Digital Currency, Blockchain, Bitcoin, Cryptocurrency and raising capital through the sale of tokens or coins (ICO or Initial Coin Offerings).

Blockchain ecosystem in India is evolving at a rapid pace and a proactive legal approach is required by blockchain lawyers in India to understand the complex nature of applicable laws and regulations.

The legal frameworks for DAOs from around the world

Business and Technology Updates

DAO in Switzerland

In comparison to the other European jurisdictions and the Wyoming LLC model, Switzerland provides a much more flexible and easy-to-foundation model with moderation taxation, making it the most used jurisdiction for DAO. There are three commonly used DAO legal structures in Singapore, namely, the Swiss Foundation Law, the Swiss Association, Decentralized Autonomous Association (DAA), and the Private International Act (PILA).

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The Swiss Foundation Law

For long-term decentralization projects, the Swiss Foundation is the ideal legal entity. This Swiss foundation setup requires registration in a public registry, an irrevocable foundation deed, and supervision by a federal authority. However, for decentralized projects wherein activities evolve and mature with time, this legal entity is not very appealing.

Swiss Association

The Swiss Association provides more flexibility than the Swiss foundation. Further, it is a separate legal entity wherein having a resident board member is not required. Its members can be individuals or legal entities having limited liability. The geographically dispersed blockchain projects having a common goal or charitable purposes use the Swiss Association as DAO legal framework. Furthermore, the Swiss Association offers tax exemption. Tax exemption is also granted to commercial enterprises having an association as DAO legal framework, provided that the business is a subsidiary having charitable objectives. For NPOs and NGOs, they have been the entity of choice. Some of these are incorporated as associations, like the World Wildlife Fund, FIFA, and the like. 

The governing body of the association is the general assembly that appoints the board of directors, decides on the admission of members, and resolves all matters concerning the association’s articles of association. A recent use case for the Swiss Association is Libra.

A Decentralized Autonomous Association (DAA)

DAA helps to achieve a DAO with limited liability. The general assembly is the governing body of the association that appoints the board of directors, decides on the admission and expulsion of members, and resolves all matters concerning other corporate bodies in the articles of association.

Private International Act (PILA)

This is a newly developed legal entity that provides a DAO, a legal structure recognized under Swiss law. It allows DAO to exist as an internet native and also to be recognized under the Swiss legal order. Based on the theory of equivalence, the code of DAO is considered a governing law, and digital space is an online jurisdiction. This is a new type of DAO legal structure wherein a DAO is not created as per the law of a state and is recognized in Switzerland as a foreign company with rights and obligations. 

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DAO in the Cayman Islands

Cayman Island is one of the jurisdictions that has been chosen by a lot of Cryptocurrency projects to create a DAO legal wrapper. The Cayman Islands Foundation Companies Act, of 2017 introduced a new form of legal entity known as a “foundation company”. This foundation company acts as an ideal DAO legal structure that functions as a civil law foundation, providing incorporated trust and retaining a separate legal personality and limited liability of a company. Furthermore, a “foundation company” can be structured without centralized shareholders, wherein all the decisions are made by the members of the DAO community. 

Foundation company as a legal wrapper

Each DAO maintains a register of its members, which must be synchronized with the register of foundation beneficiaries. In the case of a Cayman Islands foundation, the register is maintained privately, which provides flexibility and scalability for the DAO itself. Further, the Virtual Asset Service Provider Act (VASP Act), which regulates the transfer, exchange, custody, and issuance of virtual assets to the public in exchange for some considerations, has changed how decentralized projects in Cayman Island can operate. Furthermore, the foundation company also grants rewards from its treasury. This is only possible with DAOs having a Cayman Island foundation company as the DAO legal framework. MakerDAO is one example that has used foundations in Cayman Island and Switzerland. 

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Conclusion

Different legal structures have been created for DAO to give it a legal personality and to eliminate liability risk. Some of these are Delaware LLC, Wyoming LLC, Foundation Company in Cayman Island, and Swiss foundation. Wyoming LLC is the most flexible DAO structure. However, it requires a lot of paperwork and information. On the contrary, Delaware’s setup is quick and cheap with moderate taxation, but it requires every member to be updated, and each member of DAO needs to be a member of an LLC.

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Our team of advanced patent attorneys assists clients with patent searches, drafting patent applications, and patent (intellectual property) agreements, including licensing and non-disclosure agreements.

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.

Quoted in and contributed to 50+ national & international publications (Bloomberg, FirstPost, SwissInfo, Outlook Money, Yahoo News, Times of India, Economic Times, Business Standard, Quartz, Global Legal Post, International Bar Association, LawAsia, BioSpectrum Asia, Digital News Asia, e27, Leaders Speak, Entrepreneur India, VCCircle, AutoTech).

Regularly invited to speak at international & national platforms (conferences, TV channels, seminars, corporate trainings, government workshops) on technology, patents, business strategy, legal developments, leadership & management.

Working closely with patent attorneys along with international law firms with significant experience with lawyers in Asia Pacific providing services to clients in US and Europe. Flagship services include international patent and trademark filings, patent services in India and global patent consulting services.

Global Blockchain Lawyers (www.GlobalBlockchainLawyers.com) is a digital platform to discuss legal issues, latest technology and legal developments, and applicable laws in the dynamic field of Digital Currency, Blockchain, Bitcoin, Cryptocurrency and raising capital through the sale of tokens or coins (ICO or Initial Coin Offerings).

Blockchain ecosystem in India is evolving at a rapid pace and a proactive legal approach is required by blockchain lawyers in India to understand the complex nature of applicable laws and regulations.