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DAO Governance

Blockchain attorney Dr. Nick Oberheiden

Attorney Nick Oberheiden
DAO Governance Team Lead
Blockchain attorney Alina Veneziano

Attorney Alina Veneziano
DAO Governance Team Lead

Hire an Experienced DAO Team

If you need help establishing a Decentralized Autonomous Organization (DAO) or have questions about DAO governance or documentation, you need a DAO team composed of lawyers and consultants. The team can also assist you when your DAO is being investigated by a federal agency such as the SEC or IRS.

DAOs have complex legal structures distinct from traditional organizations because they allow groups of people from different parts of the world to establish an entity, with little formation and entry barriers, and conduct business – provided they share a single specific purpose.

Since DAOs rely on blockchain technology, they share the same challenges surrounding the technology. These challenges include but aren’t limited to inconsistent regulation, federal uncertainty, and a public knowledge gap. The SEC and other federal agencies also scrutinize DAOs constantly for signs of unregistered offerings, among other corporate structure problems.

If you establish a DAO, don’t let it face the same difficulties. At Blockchain Lawyer, we have experience in tackling a variety of DAO-related issues ranging from DAO formation to DAO documentation, DAO compliance, DAO management, and governance issues.

Let us guide you as you form a DAO that is compliant with federal regulations and operates consistently.

What Is a DAO (Decentralized Autonomous Organization)?

DAOs or Decentralized Autonomous Organizations can be defined as internet entities collectively owned and governed by its members. A DAO doesn’t have a central leadership. It also doesn’t require third-party intermediaries.

DAOs are very different from LLCs and Corporations. For instance, they are autonomous in nature and execution. Unlike traditional organizations, decisions in a DAO are made through bottom-up proposals. Decisions must be agreed upon by voting. What’s more, they don’t have boards, central management, corporate officers, or representatives as is the case with traditional corporate entities.

Operations of DAOs are based on specific blockchain rules. The structure is via smart contracts (pre-defined agreements that self-execute and automatically enforce provisions based on certain events occurring or failing. Voting power is based on governance tokens – cryptocurrencies related to the DAO project. The tokens offer holders equity with increased contributions increasing an individual’s voting power.

While the structure and operation of DAOs may seem complex, these organizations frequently engage in business dealings and legal arrangements with individuals and entities outside the decentralized autonomous organization ecosystem.

Decentralized Autonomous Organizations & Blockchain Technology

Blockchain technology is responsible for many things, including DAOs. The organizations rely on blockchain to run. The technology processes, supports, and stores the functions of a DAO, considering blockchain is a decentralized and distributed public ledger that stores electronic transactions and facilitates cryptocurrency transactions, smart contract processes, NFTs, and more.

Most importantly, DAOs are decentralized like blockchain with governance being independent of third parties or central government. This, coupled with how DAOs are formed and operated, makes them attract scrutiny from federal agencies like the SEC, which alongside many people has a fond memory of the 2016 DAO hacking incident when millions were stolen.

This incident left many DAOs exposed. Considering many people still don’t understand DAOs fully, and the legal and regulatory environment in which DAOs operate is still uncertain, it’s easy to see why federal agencies like the SEC are still suspicious. The importance of legal advice on DAOs can’t, therefore, be overlooked.

Benefits of Forming a DAO

Structuring your business as a DAO comes with many benefits, the most notable being:

  • Ability to have many investors from all over the globe unified for a single purpose
  • Streamlined operations and management
  • Autonomous operations via smart contracts coupled by transparency since DAOs run on blockchain technology
  • Automatic voting and governance
  • Fewer paperwork and procedural issues when forming and running traditional corporate entities.
  • Bottom-up structure decentralizes operations
  • Everyone is in control based on voting power
  • No centralization – government, management, bank, or third-party intermediaries – needed to run the organization

DAOs as Recognized Legal Entities in Different US States

DAOs are legally recognized entities in Wyoming. This makes the state a notable Fin-Tech-friendly jurisdiction. The state has clear guidance on DAO structure and operations. Many states are set to make similar moves to promote Fin-Tech innovation.

Risks of Operating DAOs

Operating a DAO comes with many risks, the most significant being:

  • Lack of member liability protection, as is the case with LLCs, LLPs, corporations. Member risk isn’t limited by individual contribution.
  • Lack of KYC/AML policies, as is the case when setting up traditional entities, makes members in a DAO anonymous in some instances. This makes it hard to comply with AML legislation and prevent money laundering.
  • Regulatory framework is also uncertain. There lacks clarity on how far US laws affect or apply to DAOs – resulting in challenges with the SEC, operations, etc.

How We Assist with DAO Governance

Our DAO team can help your DAO with:

  • Advice on initial DAO formation
  • Subsequent DAO governance, operation & management
  • Drafting DAO documentation
  • Developing a mission and strategy for your DAO
  • DAO management
  • Performing DAO compliance checks
  • Advice on the latest DAO legal and regulatory framework
  • Relationship evaluations with external/foreign parties
  • Recommendations to mitigate potential liability
  • DAO code formulation
  • DAO documentation and reporting requirements
  • DAO membership interest analysis to establish what qualifies as “security" as per federal security laws and reporting under federal registration exemption, if applicable

Since DAOs operate in an inconsistent regulatory environment, proper documentation is paramount to explain the organization’s operations, voting rights, rights of members, and the overall structure to its members, the SEC, and other federal agencies.

Get Help on DAOs

If you require advice on DAOs, contact our DAO team and claim your free consultation.

DAOs have grown significantly in popularity and usage. They have proven to be effective for individuals with unified goals to organize themselves and conduct business. However, their nature introduces many legal challenges under federal security laws.

If you have any questions about your DAO (i.e., how to form a DAO, operating a compliant DAO, etc.), consult an experienced DAO attorney. We have a DAO team capable of guiding you through every DAO-related issue conclusively.