A legal entity for the Bankless DAO in the off-chain world

Archive
1

Authors: @Eagle#2979, @FrankAmerica#0610

Read the proposal:

Date: 13 June 2021
Date posted: 10 June 2021

Summary

· Create a Bankless DAO legal entity in the off-chain world able to obtain and provide payments and to be holder of rights

· Capacity to locate the legal entity depending on the different jurisdictions

· Choose between a non-profit or a for-profit legal entity

BACKGROUND

From the genesis of the Bankless DAO, several members have pointed out the need of setting up a legal entity able to represent the DAO in the off-chain world. Discussions have focused on liability issues for DAO contributors and on practical necessities that the DAO may face in dealing with parties who are external to the blockchain ecosystem. The Legal Guild has conducted research and has assessed alternative solutions, especially on the basis of choices made by other DAOs. In this regard, the Guild had the opportunity to get in contact with Kevin Owocki of Gitcoin and Ross Campbell from LexDAO.

Due to the inherent nature of Blockchain technology, Bankless DAO seeks to be a worldwide movement and, at least in theory, every jurisdiction could be eligible to settle a legal entity. Nevertheless, in light of the benchmarking made by the Legal Guild, only the US and Switzerland were ultimately taken into consideration.

MISSION & VALUES ALIGNMENT

Given that Bankless is intended to be a movement seeking liberation from the oppression of the traditional financial system, the Legal Guild has committed itself to a guiding principle, which could be depicted as “off-chain minimization”. This means that legal compliance issues in the off-chain world should be limited to the minimum: i.e., to matters that are fundamentally necessary to the DAO and its community. The legal entity should be seen as the tip of an iceberg: The foundational structure and the members of the DAO acting all but entirely within the on-chain ocean.

SPECIFICATION

US LLC

A first solution could be to set up a US LLC. The State of Wyoming will soon up-date the Wyoming Limited Liability Company Act in order to enact a law, which is especially devoted to DAOs. 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”. The new law has raised a lot of interest but also some harsh criticism (see Lex_node’s article). Many lawyers argue that also a “simple” LLC could work for the DAO as a legal wrapper. In particular for multisig participants.

A particular attention has been devoted to the State of Delaware and to the possibility of setting up a Ricardian LLC. Ross Campbell has stated that “to host a reasonable legal framework, Delaware law is well understood and can serve to root these “Ricardian LLCs” as a “Series” of entries on a smart contract-based Master LLC Agreement, giving them a unique legal personality to enter agreements and hold off-chain assets”. The solution was also discussed during the meeting between the Legal Guild and LexDAO.

US non-profit association

A US non-profit designation or 501(c)3 for an off-chain wrapping of the Bankless DAO is also an option. The non-profit designation comes with some advantages such as not paying income tax, and an on ramp for tax-deductible gifting, as well as disadvantages like tighter rules around operational strategy, and even brand messaging, e.g., must be a-political.

One reason a US non-profit status or US for-profit status could be beneficial is that it puts the DAO in a jurisdiction where much of its contractual relationships may be developed. There is some amount of frictionless-ness baked into entities existing under a similar jurisdiction. Moreover, the tax-exempt status could free up additional funds for furthering the DAO mission, such as educational tactics surrounding blockchain technology.

Generally speaking, a non-profit entity has these three criterion for eligibility:

  1. Serve the public. 2) Tax exemption. 3. Non-political.

  1. Nonprofits serve the public. This can be in the pursuit of education, science, religion, charity, and others. The DAO might be best suited to serve in the pursuit of education. Demonstrating this service is accomplished by making donation fund use public so all participants know how money is spent. Here is a list of types of charitable organizations that serve the public.

  2. Non-profits can be tax exempt. This requires meeting all guidelines for the 501(c)3 designation laid out by the IRS here. In addition to transparent book-keeping that indicates work being done towards a public good, “none of its earnings may inure to any private shareholder or individual” (IRS).

  3. Nonprofits are a-political. Part of the tax exempt status means that the entity cannot be “an action organization”, which means, “it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against candidates” (IRS). In short, it cannot aim to sway or change public opinion on legislation, or political candidates.

As the DAO could or could not one day be interested in backing a potential piece of legislation, or candidate (probably with hilarious and witty memes) and promoting it or them this should be factored in when considering this route of legal designation.

Swiss Verein

The other examined option is the Swiss Verein, a non-profit association (see the Guild report and the video posted by Yves). What was written for the US non-profit association is in substance true also for the Swiss Verein, except for the non-political nature.

It should be noted that Swiss associations have proper legal personalities, just like companies or foundations. As such, Swiss law provides relatively flexible and simple regulation, and so long as the association is non-profit, there are no filing requirements. The associations are thus established as limited liability businesses and are therefore discussed as viable vehicles for DAOs.

A Swiss lawyer suggested that the Bankless DAO, as a digital organization, could be a member of the association and donate part of its treasury to the association. In other words, the on-chain Bankless DAO would be a founding member of the Bankless DAO Swiss association. Bankless LLC could be an additional member of the association. With minimal effort, the Bankless DAO, through a Swiss association, would solve the practical problem of having a spin-off legal entity in the off-chain world. Moreover, this entity would be entitled to a Swiss bank account capable of dealing in cryptocurrencies.

FINANCIAL IMPLICATIONS

The costs of setting up an LLC would be approximately 2.5K USD (1.05 Ether).

The costs of setting up a US non-profit association would be approximately 5-10K USD (2.10-4.20 Ether) (presumably includes hiring a qualified attorney and paying necessary fees). Price could vary depending on the attorney.

The costs of setting up a Swiss association would be approximately 5k Swiss Francs (CHF) (5.6k USD; 2.35 Ether).

BRAND USAGE

The name of the legal entity would probably include the expression Bankless DAO.

SUCCESS METRICS

Every solution has advantages and drawbacks. The majority of the Bankless community lives in the US and the DAO would probably have more contacts with US contracting parties. Therefore, having a legal entity in the US could ease things from an operational point of view.

On the other side, Switzerland offers a very crypto-friendly environment and could foster the idea that the Bankless community has a global scope. The Swiss Verein could also be open to new members (entities representing local chapters or Guilds).

It should be noted that no-one of the proposed solutions would solve the issue (where existent) of potential liability for members that are not shielded by a legal entity.

NEXT STEPS

· Involve the Bankless LLC

· Get in contact with lawyers to discuss the details

· Snapshot vote on the different solutions

SQUAD BACKGROUND

@Eagle is a Law Professor and Attorney with a European juridical background. He teaches topics related to blockchain and emerging digital technologies. He is trying to ameliorate his technical knowledge of DAOs and smart contract solutions.

  • I think that we are still not ready to take a decision on such a matter
  • I would further investigate only a US based solution
  • I would further investigate only on the Swiss Verein
  • I would further investigate both, a US based solution and the Swiss Verein

0 voters

8 Likes
2

@eagle thank you for putting this together, it was a pleasure to help with the draft. It is very important for the DAO to take its legal designation very seriously. I’m excited for us to explore possible designations further and with zeal!

3 Likes
3

@FrankAmerica @Eagle

Thank you to both of you for putting this together!

This whole project is developing quickly and excitingly!!!

4 Likes
4

Very clear breakdown - thank you, gents, for putting this together. I have some supplemental questions:

  • [how much] do we need to consider the types of activities the DAO will be participating in, in the future? Legislative/political/lobbying efforts are identified above as potentially precluding a non-profit status, but what about the other activities inside the DAO, like the potential VC fund? Does choosing one type of (especially US-based) entity then create fall-on effects that could interfere with or even preclude certain activities? How do we actively educate the DAO and new entrants or new managers over time on what is/is not allowed under certain structures? (This also brings up questions of legacy, hand-offs inside the DAO from one epoch of participants to future epochs, etc such that the Legal Guild is not constantly re-educating or re-inventing the wheel around these topics of what the DAO is or is not allowed to do. And this same problem is probably applicable to ALL DAO’s, not just ours. Can you imagine searching the Discord archive for “What is allowed for the DAO?”)
  • Registration as any type of entity then creates yearly demands for renewals - the expenses are not one time - in addition to tax filings. And choosing more demanding structures like 501(c)3’s also involve much more regulatory paperwork and quarterly/annual filings. We should elaborate upon this.
  • Speaking of taxes, we should have some section on tax impact on members. Non-profit status sounds the most favorable on this issue, but what is the tradeoff if we avoid LLC/Verein? Can all of the tax implications be distilled down to an individual’s pro rata BANK token holdings?
    As such, I voted to further investigate both US + Swiss, but would have also voted that we’re not ready to make a decision. We should elaborate on the timing sensitivities for the structure decision.
8 Likes
5

You have touched very important points my friend. I try to replicate on the three points according to my understanding:

  1. Almost every day Bankless DAO comes up with new activities/sources of revenue. Some of them are now touching also financial matters. It seems to me quite impossible to stop this flow of energy. This undoubtedly creates some regulatory risk. Moreover, augmenting the sources of revenues of the DAO and providing for a distribution of it among the tokenholders may contradict the spirit of a non-profit association. At the same time, having a for-profit entity would pose compliance challenges, as it would give the idea of a correspondence between the DAO and the off-chain legal entity.

My take on the above is somewhat extreme:

There is no legal entity, which fits with the structure and the growing activities of our DAO. In other words, no-legal entity would create a 100% safe wrapper able to protect contributors. If contributors/tokenholders are concerned, they should create their own shield in order to protect themselves.

Said this, I think that some further observations are needed:

  • DAOs are nowadays in a regulatory vacuum and pose tremendous legal challenges as to the competent jurisdictions, the applicable rules etc. The digital dimension is almost unregulated. Legislatures worked a bit on legal qualification of tokens and ICOs, on exchanges and are starting to focus on stablecoins, but are still far from regulating DeFi and DAOs;
  • No-one knows exactly whether and how DAOs will be regulated. Nevertheless, there are countries as Switzerland that show a friendly approach to crypto-related issues. Whereas others, as the US, that seem to be less favorable. Creating a spin-off entity creates a link between the country and the DAO, which in the future may count from a regulatory point of view.
  • Given the uncertainty, one could admit that the DAO acts in an unregulated environment. If this is true, the choice for the legal entity should follow two main principles: a) need for practical reasons; b) not creating regulatory risk (setting up a legal entity in a non-crypto friendly country could augment the regulatory risk).

  1. Absolutely. Only after having heard lawyers in the different jurisdictions it will be possible to have the clear pictures. At the beginning, I would definitely favor a very small structure with almost no-costs.

  2. My observation here is that – as it is the case for many DAOs – not all the DAO’s revenues will be brought off-chain. Some of them will remain on-chain and remain unregulated: taxes etc. will only be a responsibility of tokenholders until a precise regulation for DAOs will be enacted.

5 Likes
6

Great proposal. It is pretty clear that the concept of DAO legislation is an entirely new sphere. Another dimension that makes things more difficult is the composability nature of the Defi and crypto space. It’s almost becoming impossible to focus on just one thing when the space is literally intertwined. It will take some time for the US to figure out how to go about dealing with DAOs in terms of legislation e.t.c. But I also think that certain trends such as countries that are already crypto friendly will accept and be open-minded on these new and emerging issues will continue. So it’s great to formulate strategies that include both the US and countries that are very crypto friendly.

2 Likes
7

My instincts agree with your extreme take - I think maybe ANY structure might be the wrong choice at this moment. We don’t yet have - AFAIK - any current or immediately pending requirements for a legal entity to actually hold contracts or fiat payment systems, correct? This is all prospective? On the contract side, I would suggest that we impose a prelim requirement (in conversation of course) for Bankless LLC to serve as our contractual entity for limited and specified DAO needs, and that this role (like the Admin entity for Flamingo DAO) is part of what their equity compensation of 25% represents. On the payment side, perhaps we should just recommend that all payments are required in ETH or BANK, with any outside entities, and leave it up to them to convert currencies in order to transact with us.

5 Likes
8

Is there really all that much to gain from setting up an entity at this stage?. I say we stay unregulated and observe how things play out for other DAO that have legal entities. I’m sure in a few year’s time we will have a better idea of which countries are more open to allowing DAO’s to have mobility.

Everyone interacting with the DAO as a sole trader is more a decertrilized structure and doesn’t allow for the single point of failure that a seprate entity would have. It solves tax as we’d file income as individuals.
I don’t really see much of a downside of a sole trader approach although I am not a Lawer. @Eagle are there any reasons you can think of that a sole trader or company that interacts with the DOA, couldn’t just use the dao’s branding and open the same opportunities as applying to them from a central entity?

9

I agree that the first point is understanding whether we really need a legal entity. At this stage, it doesn’t seem to be the case. I agree. I think that Bankless LLC supports the DAO in the off-chain world only for small/insignificant payments.
Nevertheless, things may change and I think that we should be ready to take a decision in case of need. Therefore, I would definitely further explore both options (US and Swiss).

2 Likes
10

Currently, I’m all for finding out more about what a legal entity would look like. There’s nothing wrong with gathering more information.

However, and I’m sure this view is shared by some, anything having to do with “legal” ultimately evolves into a group of people determining what the DAO can/cannot do. For example, if a product is developed it wouldn’t be uncensorable because the DAO might have to restrict people from certain jurisdictions from accessing it.

Ultimately, I feel it’s too early to make this decision, but conducting research on the pros and cons of different options isn’t a bad idea.

I wouldn’t vote for putting the DAO into some type of legal structure at this point though. It’s just too early and anything that constrains optionality in terms of activities should be avoided. And I see a legal entity or attempting to constrain the DAO to the laws and regulations of certain entities as reducing choice and optionality.

6 Likes
11

There is a benefit to forming a legal entity to avoid being legally classified as a general partnership, at least under US law. I think the Wyoming law is an interesting development but bears at least some risk because it will likely be subject to heavy revisions in the future as other states in the US begin crafting laws with their own ideas.

There is also some risk of a federal law that would preempt state laws, but I don’t think a federal law would try to regulate internal governance issues as that’s typically a state governed matter. A key benefit of forming a legal entity is to benefit from internal governance default rules. One default rule that the Wyoming law has in it’s favor is the fact that the underlying laws recognize the smart contract as the primary document governing members’ rights because it preempts the articles of organization. Another note, if the DAO wanted to organize under the laws of a state aside from Wyoming, the LLC is a flexible enough business form that the DAO should be able to readily find transactional attorneys that can create the legal entity as an LLC under another state’s jurisdiction but import the desirable aspects of the Wyoming law.

For background only, I am an attorney admitted to practice in California and my practice areas include typical commercial litigation (i.e. breach of contract, business torts) and administrative regulatory challenges (i.e. challenging agency rules applied to businesses).

1 Like
12

I feel like we’ve lost something if there’s a Bankless LLC. I’m all for a legal entity that is only on chain.
But as soon as you tie yourself to laws and thus a country it all gets disapointingly meat-space. For as long as possible we should resist and try to be on chain only.

5 Likes
13

Moving to archive. Please reply to reopen.