DAO Governance Documentation
Experienced DAO Team
Do you need assistance forming a DAO? Do you have specific questions regarding the operation or documentation of your DAO? Is a federal agency investigating your DAO? If so, then you need the assistance of a DAO team of attorneys and consultants.
DAOs can be tricky legal creatures. They are distinct from traditional legal forms since they literally allow groups of individuals from all around the world to come together to form the entity with very little entry and formation barriers.
DAOs are very advantageous for groups of people with a single, specific purpose to carry out a business. However, because DAOs are dependent on blockchain technology, the same challenges of federal uncertainty, lack of consistent regulation, and the public knowledge gap are present.
Further, federal agencies such as the SEC will heavily scrutinize DAOs for indications of whether they engaged in unregistered offerings and for other corporate structure issues.
Do not let your DAO run into the same difficulties. At Oberheiden, P.C., we are experienced in dealing with various issues regarding DAOs—such as DAO documentation, formation, management and governance, and compliance.
Our DAO team can effectively and efficiently help you form your DAO and ensure that it is operating consistently and is compliant with federal law.
Let us help you. Put Oberheiden, P.C. on your side today to advise you on DAO governance, operation, and documentation.
What are Decentralized Autonomous Organizations (“DAOs”)
DAOs are internet entities that are collectively owned and collectively managed by its members. DAOs have no central leadership nor any need for third party intermediaries.
The relationship between the DAO and its participants is unique and vastly different compared to LLCs and corporations. While DAO participants hold certain rights, the autonomous nature and execution of the DAO make this form of business a class of its own.
All decisions are made from the bottom-up and are made through proposals that must be voted upon and agreed to by the group. There is no board or central management. There are also no corporate officers and corporate representatives as there are with traditional corporate forms.
The operation of a DAO is organized around a specific set of rules embedded on the blockchain. Their organization is structured via smart contracts—self-executing, pre-defined agreements that automatically enforce a provision upon the occurrence or non-occurrence of a triggering event.
In other words, smart contracts process decisions and streamline business operations based on the consensus of the group (during voting).
Voting power in a DAO depends on governance tokens—which are basically cryptocurrencies that are related to a particular DAO project. These tokens give their holders equity. The more an individual contributes to the project, the greater the weight of that individual´s vote.
Despite the above, DAOs frequently engage in external relations, business deals, and other legal arrangements with entities and individuals outside the DAO.
DAOs and Blockchain Technology
DAOs did not exist prior to blockchain technology. Today, DAOs need the blockchain to operate. The blockchain is the decentralized distributed public ledger that stores electronic transactions and facilitates smart contract processes, cryptocurrency transactions, NFTs, and so on.
Specifically, for DAOs, the blockchain acts as the foundation that supports, stores, and processes the functions of the DAO.
Like the blockchain itself, DAOs are decentralized entities. Its governance is not influenced by a central government or any third party.
That said, the formation and operation of DAOs has caught the watchful eye of various federal agencies, notably the SEC.
The SEC—along with many individuals—remember all too well the DAO hacking from 2016 where millions of dollars were stolen. This left DAOs particularly vulnerable: many individuals do not fully understand them, and federal agencies remain suspicious.
Further, because blockchain technology still operates in an uncertain regulatory and legal environment, regulation still struggles to keep up with DAO operation.
This only underscores the need to secure legal advice on your DAO as soon as possible.
Benefits of Operating as A DAO
There are many benefits of structuring a business operation as a DAO. We highlight a few below:
- Streamlined management of operations and management;
- Ability to have a significant number of investors from all around the world unified for one purpose;
- Operation via smart contracts, meaning greater autonomy and transparency due to blockchain technology;
- Voting and governance automation;
- Less procedural burdens and paperwork compared to those associated with traditional corporation formation, filing, and operation;
- Puts everyone in control based on their voting power;
- Bottom-up structure is set up as a decentralized operation; and
- No centralized government, bank, or third-party intermediary needed.
The above are just a few examples of advantages of DAOs.
The state of Wyoming, for instance, recognizes a DAO as a legal entity. Therefore, it provides guidance on a DAO´s structure and operation, and positions the state of Wyoming as a Fin-Tech innovation hub and Fin-Tech friendly jurisdiction.
Other states are expected to make similar steps.
Risks of Operating as a DAO
Some of the most critical risks of DAO operation include the following:
- Many DAOs are not setup to protect its members from unlimited liability. In other words, they are not formed as corporations, LLC, LLPs, and so on. Thus, the potential liability of each member is not limited to their own contribution and could potentially expand significantly.
- Traditional entities must setup various AML/KYC policies within their entity. This ensures that the entity knows who they are dealing with and acts as an important step to prevent money laundering and stay complaint with AML legislation. Individuals in a DAO are sometimes anonymous, which makes AML/KYC compliance very complicated.
- The regulatory framework´s applicability to DAOs is uncertain. It is unclear how and to what extent U.S. law applies and affects DAOs and their operation, creating various challenges for the DAO, its projects, and the individual members (not to mention the SEC).
Until greater clarity is provided by congressional legislation regarding DAO operation, structure, and even exemptions, these entities and their projects remain at risk.
How We Can Help You with DAO Governance
Below we outline key ways our DAO Team can help you:
- Advising clients on the initial formation of DAOs;
- Assisting with subsequent governance, operation, and management;
- Drafting DAO organization documents;
- Developing DAO mission, strategy, and management;
- Performing compliance checks of your DAO operation;
- Advising you on the current legal and regulatory environment of DAOs;
- Evaluating external relations, including those with foreign parties;
- Recommending steps to mitigate potential liability exposure;
- Determining what information should be included in the DAO´s code;
- Advising on DAO documentation and applicable reporting requirements; and
- Analyzing the DAO´s membership interests to determine whether these interests can be regarded as a “security” under the federal security laws and, if so, organizing reporting the DAO under a federal registration exemption.
Because DAOs are inconsistently regulated, proper documentation that explains the entity´s operation, rights of the individual members, voting rights, and overall structure is essential—both for the members and federal agencies.
Need Advice on DAOs?
DAOs have grown in usage and popularity in recent years and are an effective yet novel means for individuals with a unified purpose to organize and operate a business.
The novelty of DAOs have led to multiple legal challenges such as those relating to corporate formation and structure, issues under the federal securities laws, and federal investigations.
If you have a question about your DAO—or about forming a DAO—do not wait to get the advice you need from an experienced DAO attorney.
The DAO Team at Oberheiden, P.C. can guide you through your legal issues so that your DAO operation is compliant and operating effectively and efficiently.
We use a combination of experience, knowledge, and dedication to best serve the needs of our clients in areas of emerging technology such as DAO formation, documentation, management and governance, and operation.
Call or contact our DAO Team today for a free consultation.