On April 20, 2022, Tennessee Governor Bill Lee signed into regulation a invoice to permit decentralized autonomous organizations (DAOs), to register as a kind of restricted legal responsibility firm. As the second U.S. state to grant authorized standing to DAOs (following the same Wyoming regulation handed in 2021), Tennessee has turn out to be a trendsetter for blockchain-based company governance. This new DAO Act is predicted to draw important blockchain funding and job development to the thriving tech sector in Tennessee. As one of many invoice’s sponsors, House Representative Jason Powell, put it, Tennessee might quickly be dubbed the “Delaware of DAOs”.
What is a DAO? A DAO is a company working on a blockchain platform. Unlike a standard LLC, which is ruled by its working settlement, a DAO is normally ruled by:
(i) Smart contracts: A DAO’s working guidelines are written in laptop code saved on a blockchain ledger, referred to as the “smart contract.” This collection of executable code determines the operation of the DAO, and runs mechanically when sure predefined triggering occasions happen; and
(ii) Governance tokens: Similar to sure membership pursuits in an LLC, every member of a DAO receives tokens as a illustration of their curiosity within the DAO. As might be the case in different LLCs, it’s potential to construction a DAO in order that completely different tokens have completely different rights. The good contract defines these rights; in a typical DAO, these with governance tokens (which might be just like a membership curiosity with voting rights in a standard LLC) can suggest new initiatives after which vote on them.
When a authorized entity is a DAO, every step of company governance and decision-making is automated by way of good contracts and the participation of token holders. As a end result, DAOs are self-sustaining and autonomous entities with a self-administering organizational construction and a correspondingly diminished want for guide administration when in comparison with conventional LLCs or firms.
2. Why do folks arrange DAOs? DAOs carry people internationally and their sources collectively for funding, mergers and acquisitions, non-profit objectives, or different particular initiatives. For instance, in February 2022, a DAO fashioned by a bunch of crypto fanatics raised $4 billion to accumulate the Denver Broncos. In 2021, one other group fashioned a DAO for the only goal of bidding on an authentic copy of the U.S. structure being auctioned by Sotheby’s. Aside from the frictionless governance construction, one other good thing about DAOs is, as a result of they’re actually decentralized organizations, most DAOs can subject tokens that don’t meet the present definition of a “security” and thus are capable of keep away from probably burdensome securities regulation compliance.
3. Why do we want the DAO Act? Prior to passage of the DAO Act in Wyoming and now Tennessee, a DAO was not formally acknowledged as a singular governance construction, and due to this fact there was no straightforward approach to set up a DAO construction that supplied the advantages of acknowledged enterprise entity constructions, akin to limitations on the legal responsibility of the fairness house owners. Without that safety, a token holder in a DAO that isn’t organized as one other kind of entity might theoretically be held chargeable for the money owed of the DAO, although the DAO actions had been carried out mechanically by a computer-run good contract on autopilot with none human intervention.
4. What does the Tennessee DAO Act present? The new DAO Act amends the Tennessee Limited Liability Company Act and permits an LLC to make an election to turn out to be a DAO. An entity might register in Tennessee as a DAO and keep on operations in different jurisdictions similar to some other kind of enterprise entity. Forming a DAO in Tennessee requires the next:
- Statement within the Articles of Organization
- The LLC should include an categorical assertion in its articles of group that the corporate is a DAO.
- An present LLC can also convert to a DAO by amending its articles of group with an categorical assertion.
- The DAO Act units forth the required assertion that should be contained within the articles of group
- Name of the Organization: The registered identify for a DAO should embrace “DO”, “DAO”, “DO LLC”, or “DAO LLC.”
- Governance Structure: The articles of group should:
- Specify whether or not the DAO is a “smart contract-managed DAO” or a “member-managed DAO.” The laws will deal with a DAO as a “member-managed DAO” by default until in any other case supplied within the articles of group.
- Include publicly out there identifier of a wise contract immediately used to handle, facilitate, or function the DAO.
- A DAO will probably be dissolved if it fails to approve proposals or take actions for one 12 months, or fails to carry out a lawful goal as decided by the Tennessee secretary of state.
- A member of the DAO (i.e., the token holder) does not have a fiduciary obligation to the DAO apart from implied covenant of excellent religion and honest dealing.
SUMMARY: DAOs are poised to turn out to be a quick rising kind of enterprise group, sitting on the dynamic intersection amongst company governance, blockchain, cybersecurity, and funding. According to the World Economic Forum, the worth of property held in good contracts had grown to $13 billion by 2020. The Tennessee DAO Act is a major step in the direction of filling the hole between innovation and laws.