Thread by @milesjennings

DAOs are fundamental to the success of web3, yet they're shrouded in legal uncertainty with no consensus about a path to legitimacy.

Today, @Dave_M_Kerr and I published Part II of our Legal Framework for DAOs to chart a definitive way forward. #LFDAOs!👇
bit.ly/3x2Y6nY

1/ In Part I, we provided a comprehensive review of the US regulatory and tax challenges that threaten the existence of DAOs.

We also explored a potential solution to many of those issues, the Unincorporated Nonprofit Association (UNA) entity structure.

https://twitter.com/milesjennings/status/1453080226179608577?s=20&t=QPgrg1l0DBDrFn8TlUSFNQ

2/ Even though Part I was published 8 months ago, DAOs still face the same challenges we covered in that paper. In addition, as new use cases for DAOs have surfaced, so too have new challenges.

But fear not! We have answers.

3/ In Part II, we offer a pragmatic framework for builders to navigate these challenges and to select an entity structure for their DAOs.

We also make a compelling case for DAOs to cease offshoring practices and to instead utilize U.S. legal entities.

Let's dive in! 👇

4/ We begin with an analysis and comparison of the key features of DAO entity structures (UNAs, Foreign Foundations, Entityless, LLCs and LCAs).

Here's the table we previewed last week:

5/ We then provide significant analysis and actionable guidance for DAOs on critical topics:
(1) decentralization,
(2) stakeholder capitalism/distributions of profits,
(3) mitigating liability risks,
(4) maintaining member anonymity, and
(5) pragmatic censorship resistance.

6/ We also discuss the key tax-related considerations (both U.S. and international) that are critical for understanding the long-term viability of DAO entity structures.

7/ Next, we propose a new DAO Entity Selection Framework for builders.

The Framework starts by analyzing whether you should even be using a DAO and, if so, whether you need a legal entity.

8/ The Framework then looks at what your DAO's intended purpose is.

For DAOs intending to operate a business in the US that has real-world analogs, the domestic US entity structures used by those analogs (UNAs, LLCs and LCAs) are the best place to start.

9/ For network/protocol DAOs, real-world analogs don't exist, so the entity selection process requires a significant analysis of your DAO's operations and activities, which necessitates a clear understanding of the US and international tax matters discussed in the paper.

10/ The Framework walks through these considerations and decisively concludes that for network/protocol DAOs with significant US membership or activity, the UNA offers significant and meaningful benefits over all of the other structures.

11/ Like the Foreign Foundation, LLC and LCA structures, the UNA solves the 3 biggest challenges facing Entityless DAOs:
(1) lack of legal existence (inability to contract or own property),
(2) inability to pay taxes, and
(3) potential unlimited liability.

12/ But the UNA also addresses shortcomings of LLC structures (incl Wy. & Tenn. DAO LLCs) and LCA structures.

And unlike those structures, the UNA isn’t subject to the Corporate Transparency Act, which makes the use of LLCs and LCAs for network/protocol DAOs all but impossible.

13/ And while the UNA lacks the potential for tax optimization like the Foreign Foundation structures, significant US activity by DAOs utilizing Foreign Foundations may ultimately undercut the viability of such optimization.

14/ Further, given there is no certainty that the U.S. and other countries will ultimately respect Foreign Foundation structures, there is risk that such structures may actually be HIGHLY susceptible to government censorship (as opposed to offering high censorship resistance).

15/ Such censorship could come from anywhere, including overzealous regulators seeking unfavorable characterizations under tax laws.

The recent inclusion of countries on the EU AML blacklist and FATF’s grey list are also prime examples of censorship risk.
simmons-simmons.com/en/publication…

16/ Conversely, the more pragmatic domestic U.S. options (like the UNA) provide DAOs with (1) clarity as to treatment under U.S. and foreign tax laws, and (2) protections against encroachments from the federal government as well as from foreign governments.

17/ As we've seen with uncollateralized stablecoins, it's brutally ironic that the most extreme approaches to censorship resistance are the approaches that are most likely to cause heavy-handed regulation.

For both stablecoin design and DAO structuring, pragmatism is warranted.

18/ Finally, entity selection provides DAOs with an opportunity to further differentiate web3 from web2. The offshoring practices of web2 reflect business models that negate the true value of their users.

The business models of web3 are, and will continue to be, very different.

19/ Web3's future resides in the value creation of developers, members and users. And while this will one day lead to value creation everywhere, pragmatism is first needed to encourage the legislative progress in the US that will enable DAOs to make that future a reality.

20/ As a result, while use of Entityless and Foreign Foundation structures has been justifiable and appropriate, these structures should be discontinued for network/protocol DAOs with significant U.S. membership or activity once the pathway for the use of UNAs becomes more clear.

21/ We intend to help chart that path by pursuing legislative progress for DAOs across the US, with pragmatism being a top priority along the way.

It's critical to establish consensus along the way, so please help us by sharing this post and our paper: bit.ly/3x2Y6nY

+/ Bonus: Part II also includes handy reference guides for the various entity structures, collapsing all of the information in Parts I and II into single page summaries of the advantages, disadvantages and best use cases for each structure. Check them out!

Thanks to all who have already helped us along the way: @boironattorney, @DerekColla, @AdamZuck13, Jason Schwartz and Marianne Winkler.

None of the above should be taken as legal, business, tax, or investment advice; please see a16z.com/disclosures for more information.

Also, if you like the above, give @David_M_Kerr a follow. When it comes to DAO entity structuring, there's no one more knowledgable in the web3 ecosystem.