GIP-76: Set up a legal entity controlled and owned by the DAO?
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GIP: 76
Set up a legal entity controlled and owned by the DAO?
author: Monika
status: Draft
type: Meta
created: 2023-01-20
Simple Summary
This is a proposal to set up a legal entity (in the form of an LLC) owned by a Gnosis DAO wallet that enables the GnosisDAO to interact with business partners with an incorporated entity.
Abstract
This new legal entity:
● Can enter into contractual arrangements on behalf of the GnosisDAO
● Can make payments to different service providers that are undertaking
services on behalf of the GnosisDAO
● Can hold assets/digital property such as patents, copyrights or trademarks
● Is not owned by a physical person nor an official representing the company,
instead the legal entity is owned by a smart contract address that is
controlled by the GnosisDAO
Motivation
The GnosisDAO is the decentralized collective steward of the Gnosis ecosystem. It is participant managed, and does not have any director or manager. No single party is in control. As the GnosisDAO exists entirely on-chain, it is not always recognised as an entity with legal personality or limited liability. Some maintain that an unincorporated DAO cannot enter into contracts with outside entities, hold bank accounts or assets, or make cash payments. In order to be able to function in the web2 world, we can create an associated legal entity owned by a smart contract address that is controlled by the GnosisDAO.
Specification
Together with OtoCo (see OtoCo - Automated Company Assembly on Blockchain) it is possible to create an LLC in Wyoming with a member that is neither a physical person nor an official representing a company. Instead, the member can be a smart contract address.
This is achieved through a so-called Series LLC. A Series has a Master and individual Series. Each Series is considered an LLC in its own right, with its own name and its own Member(s) independent from the Members of the Master LLC and other Series’ Members. Individual Series need a first Member. The first Member of a Series LLC can be a smart contract address, using the OtoCo company assembly smart contract.
Each Series LLC is represented by an NFT minted by the OtoCo Master contract. Company information, such as the name, is contained within the metadata of the NFT, which can be looked up on Etherscan.
Transactions can be encoded via payload for a snapshot vote, therefore, transactions do not have to be approved manually.
For further details on the specification, see: Part II. The OtoCo Ethereum smart contracts - OtoCo Documentation (gitbook.io).
MakerDAO also had this kind of discussion quite a while ago:
Pros of establishing a DAO LLC in the United States:
Legal recognition: The organization would be legally recognized by the government, which may increase trust and participation from users.
Liability protection: Liability protection for the organization and its members.
Clarity: Legal clarity for the organization and its members, making it easier to navigate any legal issues that may arise.
Compliance: Make it easier for the organization to comply with local regulations and laws, which could be beneficial in the long term.
Cons of establishing a DAO LLC in the United States:
Decentralization: Such a step would go against the decentralized nature of DAOs and could limit the autonomy of the organization.
Jurisdiction: Establishing GnosisDAO LLC in the US would subject the organization to the jurisdiction of US laws, which may not be ideal for a DAO as a global organization.
Complexity: Could be a complex process and may require specialized legal expertise.
Costs: Likely be costly and may require ongoing expenses for compliance and legal fees.
Security classification: This could raise the issue of whether GNO/mGNO would be considered a security by the SEC. This could have significant legal and financial implications for the organization and its members. It could also limit the potential users and investors, who would be restricted by the regulations.
Hello - @monika, in order for this to be a valid GIP in phase-2 you’ll need to include a yes/no poll. Please refer to the Governance Tutorial. If you have any questions feel free to ping me.
In my opinion, no one should start a DAO incorporated in the US.
All these workarounds just add more complexity that can be avoided if you just incorporate in e.g. Switzerland (See Safe Foundation and Ethereum Foundation).
If you do this method in the US, even with all these legal gymnastics, you will still be restricted by SEC and federal laws.
For example, if you setup a DAO using this method, you likely still can’t even issue tokens because of the Howey test.
GnosisDAO could think about to setup a foundation in Switzerland. This would make more sense imo.
Why Switzerland:
Switzerland has supportive and crypto-friendly regulations
Swiss government has established a clear regulatory framework for cryptocurrencies
Switzerland is a stable and secure location for financial services companies
Switzerland has a strong tradition of banking secrecy, which can provide a level of privacy and security for the foundation’s operations.
The Ethereum Foundation is also there:
The Ethereum Foundation is a non-profit organization that was also established in Switzerland, specifically in the canton of Zug, which is known as the “Crypto Valley” due to the presence of many blockchain and cryptocurrency companies in the region. The foundation was established to support the development and adoption of the Ethereum blockchain and its associated technologies. The Ethereum Foundation is responsible for managing the Ethereum project’s assets, funding development and research, and promoting the use of the Ethereum technology. The foundation works closely with the Ethereum community to ensure the continued development of the Ethereum ecosystem.
Thank you for your feedback on this important discussion. One key clarification: The intention is not to incorporate the DAO as a US LLC or to establish a form of “legal wrapper” for the DAO. Instead, the purpose behind this proposal is to incorporate a subsidiary entity that is wholly owned/controlled by the DAO, and has separate personality to enter into legally binding obligations with third parties. The role of the LLC will be to perform certain defined activities, as approved by the DAO and delegated to the LLC from time to time. One typical example could be entering into legal agreements with service providers. The issuance of tokens is a complex legal issue in many jurisdictions, and we do not envisage that the LLC would be used for this purpose. The Otoco protocol enables a fast and cost-efficient way to establish an LLC that is owned by a DAO controlled address, and has relatively limited ongoing maintenance requirements compared to other structures used by DAOs across different jurisdictions.
A distinction without a difference, I still wouldn’t recommend doing it in Wyoming.
Also from my understanding, it can’t be turtles all the way down. At some point, ownership has to be tied to a a corporation or an individual.
If the DAO tries to say that actually the LLC is owned by a smart contract, the legal authorities will say, who are the signers for this smart contract?
I’m not a lawyer btw, but from what I know about governments they usually require that no matter what form is taken someone can be held responsible.
I recommend just doing what the Ethereum Foundation has done and then tweaking to suit Gnosis’ needs as necessary. Ethereum Foundation is the best example of a DAO in the blockchain space. It makes sense to follow their example.
While I love the general idea of this proposal as it would be a huge bump in helping with clarity and compliance which is important for long term growth, I worry that it may open up a pandoras box of “unknown unknowns” and put us in the crosshairs of 3 letter agents that the DAO is not ready to take on.
If the situation with Gemini and Genesis lending vs SEC this past week shows us anything, the SEC will give you just enough rope to (pardon the expression) hang yourself with, and come after you while the chips are down to collect a payday.
This is a great idea and path, and I think could benefit everyone if there right combo of preparation, due diligence and regulatory clarity… But I don’t think it is something we need to rush into at this time given the all out spectacle of US crypto regulatory discussions. Let other DAOs dive head first into this situation…and let us learn from those mistakes as regulatory clarity surfaces…
Probably best to save this discussion for a point in time where there is a specific limitation that the DAO is encountering, which a DAO LLC would solve. Then, GNO holders can weigh the specific benefits/risks to considering such a move.
Hi mrtdlgc, I appreciate your concern here. Establishing a legal entity owned by the DAO would not necessarily compromise on decentralization since any activity that the entity engages in will ultimately be subject to the DAO’s decision making process and governance framework, which remains decentralized and autonomous. Accordingly, one could view this proposal as a way of preserving the DAO’s autonomy and decentralized governance, but which enables execution through an established legal entity.
These are valid points that you raise, and obviously there are still many grey areas when it comes to the issues affecting DAOs, as the legal / regulatory position continues to evolve.
This is why it will be important to remain vigilant of developments in this area and what activities the entity engages in from time to time, so that we can try to mitigate any potential legal/regulatory risks going forwards.
The example you refer to with Gemini and Genesis is quite different in my view, as those actions relate to trading/lending products offered to customers by a centralised exchange, which is definitely not the case here and the LLC should not be used for purposes which would bring it within the scope of a regulated activity in the US.
The main purpose of the LLC would be to enable the DAO to execute governance decisions through a real world entity, that is able to establish legally binding and enforceable obligations with third parties, who may require an established legal counterparty for whatever reason. The purpose of this proposal is simply to incorporate the entity, but any activity of that entity in the future would be subject to further approval by the DAO. This way, the DAO has full control over the activities of the LLC. So each activity of the LLC would go through a due diligence process, further discussions among the community and a governance vote.
Hi DigitalConsultants The idea for proposing to set up an entity arose from the specific limitations the DAO faces today, namely entering into agreements with third parties who require a legally established counterparty.
For sure we might get a different view if we know more about the details it should be used for. Otherwise I also would prefer a swiss based foundation, but ofc there might be drawbacks like higher costs.
HI! I perfectly understand the necessity to sign a contract IRW, hold bank accounts or assets, or make cash payments.
The main problem that I see with GNOSISDAO owning a DAO LLC in the United States, is that the DAO LLC must comply with the USA regulation. I understand that technically the company will be owned by a smart contract, but in reality the owners will be the GNO holders. So, in this way, GNO holders will be part of that “SubDAO”, Is that correct? All parties should comply with USA regulation. Is that possible?
Another point to analyse is the possibility that GNO would be considered a security by the SEC, despite the fact that GNOSISDAO is not going to incorporate as an American LLC.
Regarding taxes, OtoCo doc mentions that “Unless a multi-member LLC has no revenue or expenses/credits to claim, a Form 1065 will need to be filed with the IRS and each member will be required to fill out and attach a Schedule K-1. This does not mean you are liable to pay taxes, it is just a reporting requirement”. A report is an obligation that should be complied with.
In some cases, multi-member LLCs may be required to file a Form 8804 and 8805. Does it apply to GNO holders?
Note: non-resident members of the LLC are still supposed to submit a personal 1040-NR for any income sourced from the U.S. and would need an ITIN”. How do you plan to comply with this regulation?
If you want to anchor the GnosisDAO in a US jurisdiction, so that it may be considered a US person (including for sanction compliance, tax payments of income etc), then this may be a solution. If this is not the case, passing this proposal may undo GnosisDAO painstaking daofication, in which Otoco was considered as a possible avenue and not chosen. Even if this is via a “subDAO”, I think the risk is rather large for GnosisDAO to be drawn into the US facing an increasingly hostile regulatory environment, especially in relation to sanctions. Right now, I see not much clarity as to the legal distinctions in wrapping a DAO and setting up an “assisting” subDAOs, if the DAO is the one initiating the LLC. If a specific team wishes to have a US LLC, I would suggest for GnosisDAO to spin the team off first and the team then deciding themselves to set up this entity - so that there is a clear separation between the unincorporated GnosisDAO and that team’s LLC. In my opinion, you will not create the level of separation necessariy having the DAO initiate the Otoco LLC. The risks are high. If GnosisDAO hopes to have a jurisdiction anchor, I believe there are better options that are less prejudicial and may allow for greater long term neutrality of the GnosisDAO.
@monika Can you please elaborate on why Wyoming was chosen?
I actually think that having some legal entity to deal with off-chain activities is necessary and a good idea. Thank you for taking the time to do this. What I think is most helpful is more details on why Wyoming was selected relative to all other jurisdictions?
A suggestion to make this proposal better:
A list of different possible jurisdictions for incorporating (for example, US, Switzerland, Singapore, Dubai)
Positives and negatives of each jurisdiction.
A summary saying, “based on comparing all these countries, we recommend forming the legal entity in X country because of Y reasons.”
I believe Fidelity Digital is working towards being able to offer an account registration type specifically for DAOs (we probably won’t see anything until crypto regulation is passed in the US).
Regarding ownership disclosure requirements for LLCs, there’s some good info here:
Is there a reason to prefer the US over other jurisdictions for this?
Does the DAO actually need to wholly own/control this entity for it fulfill the functions you described? Or could it suffice to have a distinct organisation with a mandate to perform these duties written into its by-laws/constitution/articles of incorptation/etc?
The discussion shows clear and valid concerns from the community.
Although there is always a certain element of risk, when looking for new ways to enable transactions IRW, the comments have shown that any touchpoint to the US is a risk, the community does not want to test.
This proposal will be tabled and alternative routes will be considered.
Thank you for participating in the discussion and for voicing your opinion, it is very much valued.