In the next few weeks, my colleague Yev Muchnik and I will be posting some of our thoughts on legal aspects of DAOs. Yev has been in the blockchain world for a long time and is a renowned expert in the subject. Providing legal support to cooperatives and social enterprises adopting democratic governance is a substantial portion of my work. DAOs has become the place where Yev’s work and mine overlap.

This year, I have supported a variety of informal DAO clients in their transition to a formalized legal entity, as they chose to adopt the cooperative model (spoiler: even though cooperatives may be formed as LLCs, our clients choose to forgo the Wyoming law), and have a few more in the stack. I’ll share some of what I have learned during that process in an upcoming post.

But this weekend marks the first month since the Wyoming started registering DAOs as limited liability companies (under the Wyoming DAO Law), and I decided to summarize the changes brought by that law. As of July 30, 2021, 51 DAO LLCs have been formed under that law (and a few additional entities with foresight had already formed their DAOs as LLCs in that state).

As you may know, Wyoming was the first state to adopt LLC (limited liability company) legislation. Thirty-four years later, Wyoming is the first state to adopt legislation formalizing the formation of decentralized autonomous organizations.

Under that law, the DAO LLC is an election made by LLC members when forming the LLC. The election is made by adopting certain provisions in the Articles of Organization (Article), which are filled with the Wyoming Secretary of State. To exist as a DAO LLC, the organization must adopt two statements in its Articles: an explicit statement that the organization is a decentralized autonomous organization and another statement that, in summary, provides notice of the restrictions on duties of the members and transfers of the members’ membership interest in the DAO LLC.

These formal DAOs must also adopt the abbreviation DAO, LAO, or DAO LLC at the end of their chosen entity name. Note that the law does not explicitly prohibits the use of DAO by other entity types. The relevance of this fact is unclear to me at this point, but I highlight it because cooperatives do face the issue that, in some states, only the entities formed under a certain cooperative statute may use the name cooperative or its abbreviations (looking at you Vermont, but there are others).

While conventional LLCs may be member managed or manager-managed, WY DAO LLCs may be managed by members or be algorithmically managed via an underlying smart contract, and if this is the case, then the Articles must include a public identifier of the smart contract used to manage; the presumption is that the DAO will be member-managed if the DAO organizer does not make an explicit choice.

The Articles can provide for and smart contracts can (but really shall) govern the relations among the members and between the members and the organization, the rights and duties of the members, the activities of the DAO, the means of amending the operating agreement, if one is adopted, the Articles, and all other aspects of the DAO. The adoption of an operating agreement is not required – though you will rarely see an attorney encouraging a multi-member LLC not to adopt one; maybe that’s different for DAOs?

Another noteworthy aspect of the DAO law is that members have no fiduciary duties to the organization. That’s not a surprising factor – members of LLCs or corporations are typically not fiduciaries of the entity unless they play certain roles (as managers, board members, etc.), but under this law they have an express duty to act in good faith and fair dealing (these duties are typically implied in contractual relationships).

When it comes to regulating membership interests, the law provides default rules in case the organization has not adopted its own (via Articles or operating agreement). Under the default rules, if members do not contribute digital assets to the organization as a prerequisite to becoming a member, each member will only possess one membership interest and be intitled to one vote. I’ve seen DAOs who choose to mint governance in a way that eliminates this default provision.

Another default element of the WY DAO law is the requirement of not less than a majority membership interest for voting quorum, which I have also seen DAOs eliminate.

The advocates and drafters of the DAO law found it appropriate to eliminate any right of the members to have access to financial records and records of the activities of the organization. This provision is as curious to me as it is the fact that a member cannot withdraw its own membership unless the DAO has adopted provisions establishing the withdrawing procedure. For a law that sought to enable the functioning of the DAO in the legal sphere, it feels archaic that the default withdraw process requires the majority of the members to approve the withdraw of a member who is no longer interested in being engaged in the organization.

Some of these provisions may strike you as opposed to some of the fundamental cooperative principles; and I would agree. This is a topic for another blog post though. In the meantime, let me know what questions you have about DAOs!