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I get a lot of calls/questions--do I need a "legal wrapper" for my DAO?
First, what is a "legal wrapper"? It is not necessarily an entity. It could be any kind of legal ordering--it could be a charter or constitution among members of an unincorporated association.
Secondly, you have a legal wrapper whether you want one or not. If you don't write one down, the law will apply one to you anyway when there is a dispute--and usually those "default rules" are the worst (e.g., fiduciary duties & joint/several liability for all DAO participants).
If you have a DAO and don't define it, then:
-if it has a for-profit purpose the law will say that DAO is a general partnership
-if it has a not-for-profit purpose it will likely be a not-for-profit unincorporated association.
-if it has a for-profit purpose the law will say that DAO is a general partnership
-if it has a not-for-profit purpose it will likely be a not-for-profit unincorporated association.
Given point #2, the answer ALWAYS is:
"yes! you need a legal wrapper!"
Then YOU can define the rules. Otherwise a court will do so later.
There is no comfort or freedom in chaos; it merely cedes greater ex post power to courts and lawyers.
"yes! you need a legal wrapper!"
Then YOU can define the rules. Otherwise a court will do so later.
There is no comfort or freedom in chaos; it merely cedes greater ex post power to courts and lawyers.
Point #3: you don't always need an entity.
The default rules for not-for-profit unincorporated associations in many jurisdictions grant similar limited liability protections as having a corporation.
The default rules for not-for-profit unincorporated associations in many jurisdictions grant similar limited liability protections as having a corporation.
Even if your DAO is for-profit, if you have a good legal charter you can waive most sources of liability among members of the DAO. And if the DAO enters into contracts with 3rd parties, you can waive most sources of liability in those contracts.
What is the remaining risk delta between an unincorporated DAO and an LLC? Torts.
You can't eliminate your tort liability through contract. If the DAO defrauds someone or manufactures a harmful product, everyone can be liable if it is a general partnership.
You can't eliminate your tort liability through contract. If the DAO defrauds someone or manufactures a harmful product, everyone can be liable if it is a general partnership.
But--how many DAOs will be manufacturing or operating products?
MakerDAO does--so there could arguably be reason to make it an entity (with each MKR holder as a member) rather than an unincorporated association.
But most DAOs don't. They are like investment clubs.
MakerDAO does--so there could arguably be reason to make it an entity (with each MKR holder as a member) rather than an unincorporated association.
But most DAOs don't. They are like investment clubs.
So, overall--
(1) yes, you should have an explicit legal wrapper for every DAO, every time; but
(2) whether that means you need a state-chartered business entity should be evaluated case-by-case.
(1) yes, you should have an explicit legal wrapper for every DAO, every time; but
(2) whether that means you need a state-chartered business entity should be evaluated case-by-case.
Here is a basic prototype I came up with for 'charter' for a DAO with no legal entity. It's not perfect but is meant to get the ball rolling on possibilities: https://github.com/lex-node/SCoDA-Simple-Code-Deference-Agreement-/blob/master/DAO%20Charter%20with%20Qualified%20Code%20Deference.md
Fork it, revise it, make it work for your project, further the cause.
Fork it, revise it, make it work for your project, further the cause.
Bookmark this thread, pass it onto your DAO friends, save me some basic newb questions and then if someone is ready to pay a lawyer to help them with their DAO wrapper, I'm happy to help!
