- There are two high-profile cases currently ongoing involving DAO entities.
- The CFTC is suing Ooki Dao for various violations under the Commodity Exchange Act. In another case, Avraham Eisenberg is facing charges of fraud and manipulation under the Mango DAO.
- These cases have exposed the weaknesses of DAOs as autonomous entities and their liabilities in the real world, bringing forth the need for DAO LLCs as a solution.
In September 2022, the U.S. Commodity Futures Trading Commission (CFTC) filed charges against Ooki DAO for “illegally offering leveraged and margined retail commodity transactions in digital assets; engaging in activities only registered futures commission merchants (FCM) can perform; and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs.”
The CFTC vs Ooki DAO case brought to the fore several issues. First, DAOs still had to follow the law and were not enforcement-proof. Secondly, the judge ruled that Ooki DAO is a ‘person’ and an entity, not just a technology. He also found that Ooki was an unincorporated association and therefore did not have any limited liability; therefore, the group liability was the liability of each individual.
Further, the court allowed the DAO to be served the lawsuit via a chatbot and a forum message. The CFTC has now requested the judge to rule in its favor after Ooki DAO failed to respond to the lawsuit before January 10, 2023, deadline.
In another DAO-related suit, Avraham Eisenberg, 27, made his first appearance in court on February 2, 2023, to answer to charges which, according to the justice department, are “engaging in a scheme to fraudulently obtain approximately $110 million worth of cryptocurrency from the cryptocurrency exchange Mango Markets and its customers and achieved this objective by artificially manipulating the price of certain perpetual futures contracts.”
Earlier in October, Eisenberg negotiated a settlement with Mango DAO over his activities, thinking that would put him in the clear and exempt him from civil liability. This suit proves it does not and shows how powerless agreements in a DAO setup can be in the traditional legal system.
The need for a DAO legal entity
A DAO, as it exists, is open to three significant liabilities; Unlimited judicial liability, unlimited tax liability, and unlimited financial liability.
Unlimited judicial liability
Unlimited judicial liability means that the individuals involved in a DAO can be held personally responsible for the actions and decisions made by the DAO. The DAO could face lawsuits from regulators in the sector they are in or from its investors. The lack of a legal structure limiting members’ liability exposes them to all kinds of legal repercussions in case of lawsuits, from financial losses to jail time.
Unlimited tax liability
If the DAO activities earn income or collect money, the laws in its jurisdiction may require it to pay taxes on those earnings. However, because it has no legal structure and is unregistered, every DAO member becomes liable for any penalties and unpaid taxes charged. They may have to pay them out of their pockets if the DAO does not have the funds to meet the penalties.
Unlimited financial liability
If the DAO engages in financial business and fails to meet set regulations in the jurisdiction they operate on, like in the case of Ooki DAO, they fail to meet verification requirements, including Know Your Customer, they are liable for harsh penalties. Also, if the DAO fails to pay for services received or to any other creditors, all members become financially liable for any sums owed and the accompanying interest. As the Ooki DAO case shows, the regulatory body or creditors may not need to find every member of the DAO, even one or two associated with it can be found liable for all the actions committed by the DAO.
Such liabilities can lead to loss of investment and loss of personal assets. That’s because, as this article points out, without a legal entity, the DAO is essentially an unregistered general partnership by default. To receive protection from liabilities exposed to the company, they need to create a legal wrapper for the DAO, in this case, a DAO LLC.
How to form a DAO LLC
A Wyoming DAO LLC provides a way to have a legally compliant DAO LLC. Much of the process is similar to forming a traditional LLC though there are certain extra steps. You can form a DAO LLC online on the Wyoming Secretary of State page. Start by checking if your desired name is available and follow the following steps;
1. Pick a Limited Liability Company
Under the Form New Business page, choose Limited Liability Company with the Domestic option from the drop-down menu and click Next.
2. Enter the DAO business name
Enter your DAO business name in all the required fields. Remember, according to Wyoming’s law, you should have DAO and LLC as part of the business name. In the additional designation field, enter Decentralized Autonomous Organization. Then click next.
3. Fill out the duration details page
On this page, you will find a Period of Duration menu, choose Perpetual to have your DAO LLC last forever or until the time the members choose it ends. If you have a specific date you want the business to end, choose the Expires option and enter the appropriate date.
4. Choose your registered agent
On this page, you provide details of the registered agent you will use as required by law. It could be a person, an organization, or a registered agent service, as long as they have a physical address within the state and meet other minimum requirements. Once done, click next.
5. Provide required DAO LLC information
You will provide information like the DAO LLC mailing address, principal office address, email address, and phone number.
6. Identify DAO Organizers
You will provide the name and address of the DAO organizer. This is the person submitting the Articles of Organization. They could or could not be a member of the DAO LLC.
7. Provide additional articles
At this point, you provide three articles to go with your submission. They are; a statement confirming your LLC is a DAO, an identifier of the smart contract that operates the DAO, which should be publicly available (It could be as simple as a URL), and a note of restrictions on transfers and duties.
8. Review your submission
Go through the different pages of your submission using the links above and check for any errors.
9. Submit the articles
Read the terms and conditions and provide information about the filer. Click next to pay the fees
10. Submit payment
Start the payment process, provide your payment information, and checkout. A ‘Registration Complete’ display will appear, and you should be able to download the documents along with the receipt.
New business trends have seen the emergence of DAOs as new business structures. Even with the advantage of decentralization and the potential of blockchain, there are legal challenges such an entity faces without a recognized legal structure exposing members to unlimited liability. Fortunately, there is an option of a DAO LLC, which can be registered in Wyoming and offer the required shield and means to interact even with regulatory bodies.