Decentralized Autonomous Organizations (DAOs) are a new entity type only beginning to take hold as a governance mechanism for a business venture or non-profit project. Thus far two states have a legal entity that may be formed as a DAO (Vermont and Wyoming). Both states recognize an automated, blockchain-code governance which is effectuated by token holders of the DAO through a voluntary on-chain voting mechanism. Blockchain Based Limited Liability Companies (BBLLCs) as they are deemed, are a totally new and untested legal structure where regardless of current state law, a court (state or federal) may reject any provision of state law governing these entities according to another legal doctrine and treat these entities similarly to a corporation, partnership, or a standard limited liability company.

Note that these entities cannot operate in any other state than where they are formed since only one other state recognizes their valid legal existence, this would highly limit their utility. DAOs are decentralized because they are code governed, in other words, there is no board of directors, no general partner, or a managing member. However, an argument can be made that due to the voting power of token holders, particularly the majority or near majority of token holders who have a significant say in the direction of a given DAO are in fact acting as a board of directors, corporate officers, general partners, or managing members, and therefore should have commensurate legal liability protections; meaning there is a possibility that the limited liability veil may be pierced and personal liability applied is some cases, with as yet unknown fact patterns; or a lesser liability protection level applied in comparison to some of the other standard entities.

If a project wishes to function as a DAO, how would the team go about doing so? It would need to hire contractors, sign agreements, obtain legal and accounting support, etc. The answer appears relatively clear: subsidiary entities need to be formed, which are known factors, with a proven lengthy track record (in most cases LLCs), and all voting on the DAO would occur as to delegation of authority to manage such separate LLCs and consent to act on behalf of such subsidiaries by the delegated party or group. Clearly this would add a layer of administrative burdens to the function of the DAO and substantially negate its purpose.

Luckily there are already standard legal entities which allow a similar governance mechanism to a DAO without the uncertainties of liability protections, management, taxes etc. An LLC is the most flexible entity available, the equities of which may be tokenized to a similar extent as a DAO and used to vote on company decisions according to each owners’ respective membership/ownership interest and direct the managers to act according to such vote. Note that any involvement in management of an enterprise will necessarily reduce the limited liability protections to an uncertain extent, though likely proportionally to the extent such token holder is involved in management of operations and/or day to day business activities.

DAOs have potential for future use to allow public involvement in blockchain-based entity governance while circumventing various accreditation/net worth requirements for investors to be able to obtain securities from an issuer simply due to the fact that there is no centralized reliance on the issuer and the investment is not passive; however, before making such a purchase an investor must be extremely careful since they are less able to bear financial risk and possibly less capable of obtaining professional assistance in evaluating an investment and its concomitant risks.

If you are asked to invest in any business opportunity you should consult an expert who does this kind of thing on a regular basis. Unfortunately this space is rife for fraud and scammers… Don’t hesitate to reach out to this Firm should you have any needs for due diligence in a crypto-based or a standard project.       

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