On April 21, 2021, Wyoming Governor Mark Gordon signed Bill 38 into law allowing Wyoming to recognize decentralized autonomous organizations (DAOs) as limited liability companies. The bill was sponsored by Wyoming’s Select Committee on Blockchain, Financial Technology and Digital Innovation Technology and takes effect July 1, 2021.
Generally, a DAO is an organization controlled by its members with no central authority. Instead, the organization is governed by a set of smart contracts built on distributed ledger technology – or blockchain. The smart contracts automate many of the decision-making processes typically reserved for upper-tier management in a traditional company.
Currently, a big obstacle facing DAOs is the worry that any member of the organization could be held personally liable for the actions of the DAO. The new law permits DAOs to incorporate as limited liability companies – a corporate structure whereby the members of the company are not held personally liable for the debts and liabilities of the company. The new law is in essence an add-on to the current Wyoming Limited Liability Company Act.
Under the new law, a DAO “is a limited liability company whose articles of organization contain a statement that the company is a decentralized autonomous organization”. A DAO must maintain presence in the state through a registered agent and would need to include in its name a proper designation such as “DAO”, “DAO LLC” or “LAO”. A current limited liability company in the state could also convert to a DAO by amending its articles of organization. The DAO can be a “member managed” DAO or an “algorithmically managed” DAO, as set forth in its articles of organization. If algorithmically managed, the underlying smart contract must be able to be updated, modified or otherwise upgraded.
The articles of organization and/or the smart contracts of the DAO will also govern such aspects such as relations among the members, rights and duties of each member, voting rights, transferability, distributions and amendments. In addition, unless provided for in the articles of organization or operating agreement, no member has any fiduciary duty to the DAO or any member other than the implied contractual covenant of good faith and fair dealing.
While this formal legal framework is a big step for the crypto industry and may solve the issue of member liability, the new law does not address other fundamental questions:
- Will a WY DAO be recognized as a legitimate legal entity in another US state with respect to, for example, contract law or UCC matters? What about internationally?
- Will a court outside of Wyoming give legal standing to a WY DAO?
- If the DAO is member managed, could the members acting on behalf of the DAO have apparent authority to bind the DAO? Could each member be considered to be acting with apparent authority when doing anything in connection with the DAO and, therefore, this doesn’t solve the liability issue?
- If the DAO is algorithmically managed, who is responsible for updating the underlying smart contract?
- Could the DAO’s activities cause it inadvertently to be deemed an investment company under the US Investment Company Act ?
- If the DAO has “too many” members, could the reporting requirements of Section 12 of the Exchange Act of 1934 come into play?
- If the DAO issues tokens to its members as a form of membership interests, are those tokens securities? If they are securities, are they necessarily equity? Even if the interests are not tokenized, because the DAO is a limited liability company, do the securities laws apply? Will the smart contract need to be coded with certain transferability restrictions?
- What happens if the smart contracts get “hacked”?
- How will a WY DAO be treated for tax purposes? Will it be able to elect partnership or corporation tax treatment? If the DAO has too much liquidity or too many members, will it be considered a publicly traded partnership?