California DAO Bill Seeks to Provide Legal Clarity, A16z’s Jennings Said

As the fight for regulatory clarity for crypto continues at the federal level, a bill emerged this week, aiming to provide some of that clarity at the state level.

Called AB 1229, and introduced by California assemblymember Matt Haney, the bill would establish a business entity structure for DAOs. The structure, called a decentralized nonprofit organization (DNPA), would provide a framework for DAOs to establish a legal entity, pay taxes, and provide limited liability to their participants.

AB 1229 was heavily based on research by Miles Jennings, general counsel at the venture firm a16z, which sponsored the bill.

“There’s a lot of uncertainty in this space,” the lawyer, who worked 11 years at the multinational law firm Latham and Watkins, before joining a16z, said in an interview. “What [entrepreneurs] need is certainty so that they can plan on how to build and they need to spend less time worrying about these legal issues.”

Illegal Offerings

AB 1229 comes at a time when regulatory and enforcement actions by government agencies have dominated the conversation on crypto in the United States. The Commodity Futures Trading Commission (CFTC), brought an enforcement action against a DAO’s token holders last year for “illegally offering leveraged and margined commodity transactions in digital assets,” as the September 2022 press release stated.

The agency’s action caused an uproar in the crypto community as those who had participated in governance votes began to wonder whether they would be held liable for the DAO’s actions. AB 1229 may provide some of the clarity that DAO participants seek, and limit their liability based on their affiliated organization’s actions.

More Tangible

While the debate surrounding securities law and crypto at a national level has been highly contentious, Jennings thinks that passing AB 1229 is more workable.

“This is a problem that is a little bit more tangible and ready to be solved because there are existing legal structures that can be modified,” he said. “It’s not quite as heavy of a lift as changing securities laws, for instance.”

To be sure, Jennings said the newly proposed bill wouldn’t be a catch-all for all types of crypto organizations with a token. He said AB 1229 would be a good fit specifically for protocols and blockchain networks which aimed to control autonomous software through voting. The general counsel named the exchange Uniswap and the scaling solution Optimism, both of which a16z has invested in, as examples.

Not for Large Companies

For other organizations, such as investment groups built around a token on the blockchain, or other kinds of social clubs, AB 1229 wouldn’t be a fit, he said. Jennings also added that traditional companies couldn’t be considered a decentralized nonprofit either.

“You can’t put in a big management team and then have a giant hierarchy,” he said. “So this entity structure is not to be a replacement for the next Google that’s going to have 100,000 engineers.”

Financial Benefit

This isn’t to say that members of a DAO legally recognized by California can’t expect to see a financial benefit from their token ownership. “There are ways to provide value to token holders that don’t look like dividends,” Jennings said.

The general counsel gave the example of a UNI token potentially making providing liquidity more profitable. Or using the token of Aave, a lending protocol, to backstop risk through something called the Safety Module.

Next Steps

AB 1229 went through California’s Committee on Banking and Finance this week and will go through the Judiciary Committee next week. Assuming that goes well, the bill will pass through California’s lower branch of legislature and move to the State Senate.

Jennings thinks it’s possible that California’s governor, Gavin Newson, could sign the bill in less than a year. “Probably you’re talking somewhere between six and eight months all told,” he said, assuming the bill passes through the California State Legislature.