By Tyler Whirty and Kevin Nielsen
Wyoming’s bid to be the “Delaware of digital assets” continued this week. Governor Mark Gordon signed bill SF38 into law on Wednesday, making Wyoming the first state in the country to address the legal treatment of decentralized autonomous organizations, or DAOs.
What exactly does that mean?
DAOs are entities that enable a distributed group of actors to organize or achieve a certain goal or meet a mandate, broad or specific, by coordinating through a shared set of rules enforced on a blockchain. As activity and value shift into the digital realm, these entities facilitate distributed community and stakeholder coordination for a broad range of activities, from building software to pooling and coordinating capital.
SF38 addresses liability concerns around DAOs by applying a limited liability company (LLC) status to them, effective July 1st. Limited liability companies act as a hybrid that marries the pass-through taxation of a partnership or sole proprietorship (i.e. they don’t pay corporate tax) with the limited liability of a corporation (i.e. when a business fails, personal assets of the owner of the organization are protected).
Typically, DAOs would be considered a partnership – a different type of legal structure that does not have the limited liability of a corporation – meaning that the assets of each individual participating in the organization would be subject to liability for the group as a whole. Moreover, members in a limited partnership have a fiduciary responsibility to one another, meaning – in a nutshell – they have to put the interests of other people before their own. Certainly not a structure built for internet native communities.
Aaron Wright, a professor at Cardozo Law School and Co-Founder of OpenLaw, highlighted just how complex this can become for DAOs:
“The law presumes that if you’re pooling together capital and coming together to make a profit, you’ll be considered as an implied partnership,” Wright said in an interview.
This new legislation limits that individual liability and specifies whether the code or the paperwork filed with the state would take precedence, creating procedural clarity for projects.
The legislation should over time also make it easier and cheaper to set up a DAO by moving paperwork requirements into a single document (Articles of Organization).
Wright points out that there will likely be a push by the senate committee to put together some amendments to the law in the near future, primarily as it pertains to the definition of smart contracts, Wyoming statutes, and other mundane issues relating to the process of withdrawing and dissociating from the DAO.
This may very well be an early step in bridging the gap between digital, distributed organizations and traditional corporate structure.