DAO formation

A complex procedure: empirical and technological profiles.

The establishment of a DAO is a complex procedure, as it involves an intersection between empirical-technological profiles, concerning the elaboration of the underlying IT structure of the DAO, and purely legal profiles, in particular when a clear legal form is to be given to it.

From an empirical point of view, the founders need to establish the rules governing the organization and operation of the DAO and incorporate them into the code. Before it is officially established, they must also set out how the DAO will be financed. In addition, the code of the DAO must be checked before the system can be fully implemented, since it could include possible bugs and security problems.

The creation of a DAO requires the development of the smart contract, in which the rules of operation are incorporated, and the definition of the DAO's governance structure. It then involves raising the necessary capital, which is done by issuing tokens. Finally, the operation of the DAO is implemented and everything is sent to the blockchain. In the event that the DAO needs to make a decision, community members must vote on these changes.

Forms of incorporation of the DAO.

In order to be given a clear legal status, it is necessary to incorporate the DAO into one of the currently available legal models. There are various organizational models according to which a DAO can be incorporated (for more details see DAOs' current forms of regulations: an overview). An analysis of the best-known legal models in the international regulatory landscape shows that the formation of a DAO can take place according to the forms provided for limited liability companies or foundations, depending on the legal nature of the chosen entity. In particular:

a) Legislative models introducing ad hoc regulations for DAOs:

• Wyoming (§ 17-31-105). § 17-31-106 provides for the adoption of a statute with the obligation to provide certain information (including an indication that it is a DAO and those matters required by the general provisions of the Wyoming Limited Liability Act under § 17-29-201. In addition, the articles of organization shall include a publicly available identifier of any smart contract directly used to manage, facilitate or operate the decentralized autonomous organization.
• The Republic of the Marshall Islands. According to the Decentralized Autonomous Organization Act (§105) any person may form a decentralized autonomous organization which shall have one or more members by signing and delivering one original and one exact or conformed copy of the certificate of formation and limited liability company agreement to the Registrar for filing. The person forming the decentralized autonomous organization need not be a member of the organization. Each decentralized autonomous organization shall have and continuously maintain in the Republic a registered agent as if they had a place of business in the Republic as provided in the Limited Liability Act (52 MIRC Chapter 4 §5). A statute must be adopted, regulating all matters listed in §106.

b) Legislative models which, although not specifically considering DAOs, are usually used to provide DAOs with legal status:

• Blockchain-based Limited Liability Company, Vermont: according to § 4176, except as expressly provided otherwise, this subchapter does not exempt a BBLLC from any other judicial, statutory, or regulatory provision of Vermont law or federal law, including State and federal securities laws. Except to the extent inconsistent with the provisions of this subchapter, the provisions of the Vermont Limited Liability Company Act govern. For this reason, the formation of the BBLLC should be governed by the rules on limited liability companies.
• With regard to the various general legal models also used for the establishment of DAOs (in particular Delaware law and foundations), the rules laid down with reference to the individual models considered should apply.

Overlap profiles with Initial Coin Offerings (ICOs).

A key step in the establishment of DAOs concerns the raising of the capital needed to start the project.

DAOs obtain the necessary capital through the issuance of DAO voting tokens against the transfer of cryptocurrencies native to the blockchain on which the DAO is established. DAO tokens are generally allocated in proportion to the funds transferred. The initial offering of tokens constitutes an Initial Coin Offering (ICO) and is therefore subject to the relevant regulations.

In particular, the tokens underlying the DAO qualify as digital native security tokens, i.e. programmable financial instruments created as smart contracts and resident on a DLT. If the tokens issued qualify as security tokens, they are comparable to financial instruments. Therefore, their issuance is governed by the regulation of offers of financial products to the public (for further details see: Initial Coin Offerings (ICOs): legal issues according to Italian law).

References.

P. Carrière, N. de Luca, M. de Mari, G. Gasparri e T.N. Poli, Tokenizzazione di azioni e azioni tokens, Quaderni giuridici Consob, January 25, 2023, available here;

N. Tse, Decentralised Autonomous Organisations and the Corporate Form, in Victoria University of Wellington Law Review, 2020, p. 313 ss.;

J. Wanguba, What is a DAO LLC?, in E-Crypto News, available here;

C. Hamman, DAO creation: A Basic How To, in E-Crypto News, available here.