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5 Things to Consider When Creating a DAO

Experienced DAO Team

Do you need advice on creating a DAO? Are you interested in forming a DAO but are unsure on the legal requirements for doing so or the subsequent compliance obligations? Are you wondering about how the federal government is treating DAOs? If so, then you need the advice of an attorney experienced in DAOs.

DAOs are distinct, creative entities that are generally formed for a particular purpose. The novelty of DAOs has attracted the attention of the federal government and, therefore, has led to federal investigations.

It is important to be assured that your plans for DAO creation are compliant with applicable laws, regulation, and federal agency guidance. At Oberheiden, P.C., we can provide these services for you.

We use a combination of experience, knowledge, and passion for this area of entity formation to best serve the needs of our clients—whether they need general compliance advice or assistance with management, governance, or the initial fundraising stage of the DAO.

Give us a call today. Put Oberheiden, P.C. on your side today.

DAOs, Blockchain Technology, and Federal Agencies

DAOs are decentralized entities whose governance is not influenced by a centralized party. DAOs rely on blockchain technology to operate. DAOs did not exist prior to the development of blockchain technology.

Many individuals—as well as federal agencies such as the SEC—continue to associate DAOs with the notorious DAO hacking from 2016 that involved the loss of millions of dollars.

Federal agencies continue to scrutinize DAOs, which has caused a hesitation by individuals, businesses, and the U.S. states to formally adopt and accept them.

There is much regulatory uncertainty regarding DAOs. No single federal statute or provision exists that attempts to regulate or shed light on the operation or management of a DAO.

DAO Creation: Top 5 Points

Creating a DAO can be challenging not only because many people do not understand how they work but also because there is not a clear and comprehensive piece of federal legislation regulating DAOs.

Below are the top five points to consider when creating a DAO:

DAOs do not follow the formal hierarchical system associated with traditional corporations. DAOs are decentralized—meaning there is no single party or entity that exerts control.

DAOs do not require nor use a board of directors, executive officers, senior management, or other hierarchical structure. In fact, there is typically not a structure at all within DAOs. DAOs are completely decentralized—meaning that no single authority controls its management or operation.

This is in sharp contrast with traditional entities. Traditional entities will generally always have a Board of Directors and corporate executive officers that form the top of the hierarchical system. Below them are senior management level employees, followed by supervisors and, finally, low level employees

Also, DAOs are dependent on blockchain technology. The blockchain is the distributed public ledger that stores all verified transactions in an immutable and transparent manner.

DAOs operate on an autonomous nature—both the management and operation as well as the ultimate execution of its contracts are completed automatically.

DAOs are organized and operate on blockchain technology through the use of smart contracts.

The rules of the DAO are governed by smart contracts on blockchain technology. This means that the codes used to execute the operations undertaken by the DAO are immutable, cannot be altered by anyone, and are public and transparent.

A smart contract is a self-executing piece of code that is automatically enforced when a certain “triggering event” is satisfied. This triggering event is typically the occurrence of a pre-defined and pre-agreed upon event, but it could also be the non-occurrence of such a pre-defined and pre-agreed upon event.

The only way for a smart contract to be changed is for the DAO members to vote on an issue together. In other words, DAOs are driven by consensus of the entire group—which occurs during the voting process.

Decision-making authority is based on a bottom-up approach and depends on DAO governance tokens.

As mentioned, DAOs do not operate with the traditional corporate hierarchical structure. As you are already aware, traditional corporate entities use a top-down approach: all decision-making authority is vested within the Board of Directors or Upper Management.

DAOs do not use these traditional parties, positions, or titles. DAOs utilize a bottoms-up approach. Voting power in a DAO is typically determined by the particular governance tokens associated with the DAO.

The DAO governance tokens are cryptocurrencies that are created for the very purpose of operating the DAO project. DAO governance tokens are usually available in the funding stages of the DAO.

What these tokens do is that they give the members equity in the DAO. Generally, the greater number of DAO tokens an individual has, the greater the weight of that individual’s voting decision and, therefore, their ability to shape the future of the DAO.

DAOs offer numerous benefits above and beyond the traditional corporate form.

Traditional corporate entities offer the usual benefits of voting rights and financial benefits distributed to the shareholders in the form of dividends.

The benefits associated with operating and managing a DAO extend even further. For instance, a DAO can connect individuals from all around the world to a single project for the same purpose. This process—starting as early as the DAO´s funding stage—streamlines the operation and management of the DAO.

Some other prominent advantages include the following: automation of governance and operations; bottom-up structure; complete decentralization; transparency and immutability due to the use and reliance on blockchain technology; and the ability to either reduce or completely eliminate several procedural burdens associated with traditional corporate entities such as entity formation, filing requirements, and so on.

Another benefit appears to be the willingness—although slow—of some states to be more friendly to and encouraging of blockchain technology. The state of Wyoming is the best example. Wyoming recognizes the DAO as a legal entity. Because of this, other states are expected to take similar measures.

DAOs have several important business and regulatory risks that are sometimes overlooked.

Despite the benefits discussed above, it is also important in the DAO creation stage to note the risks of DAOs. One of the primary risks is that DAOs do not protect its members from unlimited liability. This is because DAOs are not generally formed as a corporation, LLC, or LLP. As a result, each member in the DAO has potentially unlimited liability.

Another risk is the uncertain regulatory environment applicable to DAOs. Federal agencies do not have a standard approach or piece of legislation when dealing with DAOs. Instead, they are relying on already-existing statutes when investigating DAOs.

One final major risk involves the inability to perform appropriate and comprehensive anti-money laundering and know-your customer (“AML/KYC”) policies. This is required for many traditional entities to ensure that the entity knows who its customers are. The goal of AML/KYC policies is to prevent money laundering. Because DAO transactions and operations are anonymous, it is extremely difficult—if not impossible—to perform AML/KYC checks.

Contact our Team for Advice on DAOs

DAOs are now an unstoppable means of forming, operating, and managing an entity for a single purpose between individuals that are oftentimes located all around the world.

In addition to attracting the attention of the federal government, there are several things you should keep in mind when considering creating a DAO.

It is especially important to be cautious and seek out an experienced DAO team of attorneys who can advise you on how various federal agencies are treating DAOs.

At Oberheiden, P.C., we have an experienced team of attorneys who are knowledgeable in DAO creation, operation, and management.

We can outline your compliance obligations, including whether you may have any registration responsibilities. We can also guide you through a federal investigation and formulate a strategic defense strategy in instances where a federal agency is investigating your DAO.

Do not wait to get the clarity and advice you need in today´s environment of regulatory uncertainty.

Call or contact our DAO Team today for a 100% free consultation.

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