In this guide, we’ll discuss steps you can take to choose a legal wrapper for your DAO.
This is not legal advice, rather, it is written to help you get an overhead view of the regulatory options for DAOs so you can best protect yourself and your contributors.
Much of this guide is split between U.S. and non-U.S. entities. This is because of the unique regulatory environment in the U.S. It’s essential for DAOs to consider the nationality of their members when choosing a legal wrapper. If a DAO has a significant number of U.S. members and the organization is “wrapped” in an entity that the U.S. deems insufficient, unfriendly, or uncooperative, there could be government intervention.
Your DAO needs a legal wrapper for these reasons:
Your DAO also needs a legal wrapper as a kind of insurance policy against the future of regulation in the crypto space. a16z wrote, “In the next wave of growth for the industry, the most successful networks and protocols will have too many users and too much income to be overlooked by regulators and would be attackers.” When it comes to future regulation, being in a legal gray area could be dangerous for contributors.
It’s best to get a legal wrapper before you start your DAO if you want to perform any of the actions listed above. If you get a legal wrapper retroactively, it may be more difficult to get buy-in from all your contributors. By getting a legal wrapper first, contributors can properly evaluate the wrapper and decide if they want to work in your organization. Waiting until later could cause regulatory headache.
However, if you haven’t gotten a legal wrapper yet, don’t worry: it’s not too late to become legally compliant.
DAOs can organize in these ways:
United States:
Outside the United States:
A16z put together a checklist and flowchart showing the advantages and disadvantages of each organization type. See the chart below:
This non-exhaustive list includes a few possible legal wrappers:
For DAO builders navigating legal wrappers, you may wish to consult a verified DAO Expert. Otoco is one of our DAO Experts that specializes in legal wrappers for DAOs. Get in contact with them here.
An Unincorporated Nonprofit Association in the U.S. might be the most flexible option DAOs have for incorporating today. With the precedent of liability protection, it still offers limited liability of members even with the “unincorporated” status.
This framework is best for DAOs that:
Wyoming paved the way for DAO LLC registration when they introduced legislation specific to DAOs. This wrapper is unique because it allows members to specify a smart contract as a manager in the system, rather than only human managers. However, DAO builders should tread lightly, because the Wyoming DAO LLC is more restrictive than a typical LLC.
This framework is best for DAOs that:
Delaware is a common state in the U.S. for companies to register their traditional organization because of its flexibility, low fees, and beneficial tax treatment.
This framework is best for DAOs that:
The Marshall Islands are where a large portion of the world’s ships are registered. Because shipping is multinational and difficult to categorize, they use the special jurisdiction of the Marshall Islands. In this framework, DAOs don’t need to register as a separate LLC. Instead, DAOs are recognized as a legal framework in themselves, without needing a new entity.
This framework is best for DAOs that:
The Swiss Association framework is a way for DAOs to register as a nonprofit organization in Switzerland. Zug is known for being blockchain-friendly, and can be a good home base for DAOs. While the actual creation of the organization doesn’t require much paperwork, it requires the DAO to write the bylaws of the organization and list board members beforehand. This option doesn’t allow for DAOs to be considered fully decentralized, and many early-stage DAOs might not be ready to write such bylaws.
This framework is best for DAOs that:
A16z’s Legal Framework for DAOs Part 1
Best for:
A16z’s Legal Framework for DAOs Part 2
Best for:
When it comes to legal situations in DAOs, it’s best to do extensive research and hire a lawyer. Aragon is not your lawyer, and we cannot advise you on which legal entity to select.
For additional legal advice, you may want to consider hiring one of our qualified DAO experts. Find a service provider to help you wrap your DAO here
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