Driving Innovation - Opportunities for Wyoming’s DAO LLC Statute

A novel type of entity has emerged in the world of global finance. It is called a Decentralized Autonomous Organization (“DAO”) and it was created to offer several benefits over traditional corporate structures. DAO’s are digital organizations built on blockchain technology and managed by their members in a democratic voting environment, DAO’s reduce transactional costs by removing the need for third parties, and DAO’s spur innovation in small business by making access to banking and capital more equitable. (Brynly Llyr, World Economic Forum). DAO’s have become so common that around 16 percent of American’s have invested in, traded, or used assets held in these organizations. (White House Fact Sheet). As of November 2021, DAO’s had been used to create $3 trillion in market value. (White House Fact Sheet).

Wyoming attempted to welcome innovation by creating a DAO specific LLC Statute. (Andrew Bull, CoinDesk). In doing so, Wyoming inadvertently made itself one of the most restrictive states in which to form a DAO. In most states DAO’s can register under the traditional LLC statute with none of the required disclosures or dissolution provisions adopted by the Wyoming DAO LLC Supplement. (Jordan Teague, The Defiant). However, as discussed in the following analysis, the Wyoming DAO law is riddled with required disclosures and dissolution provisions that make complying with the law burdensome. Id. When entities fail to follow corporate formalities, the owners risk personal liability for the debts and damages incurred by the company. (NOLO). The DAO industry will be limited by legal vulnerability until the uncertainties and rigidities discussed next are removed. Id.

The statute is made up of sixteen sections that differ from Wyoming’s traditional LLC statute. (17-31-101-116). However, there are four key areas of Wyoming’s DAO LLC statute that limit DAO innovation, which are now being replicated in other states, such as Tennessee. (Tenn. Code Ann 48-250-101). The first section of the statute that dissuades DAO’s from organizing in Wyoming is section 17–31–103 which applies the Wyoming LLC Act to all DAO’s that organize in the state. (17–31–103). Section 103 is unclear because it does not address whether DAO’s can organize under the state’s traditional LLC statute or if DAO’s must register as a DAO LLC. This is an issue because there is no case law demonstrating that DAO’s will receive limited liability protection as traditional LLCs. Therefore, DAO’s registering in Wyoming as traditional LLCs may be more certain to lack limited liability protection since there is a specific DAO statute. Wyoming opted not to clarify this issue in the latest amendment even though the Wyoming Secretary of State testified that it had already modified their systems to reject the name of any traditional LLC if it includes the word DAO. (Select Committee on Blockchain, Financial Technology and Digital Innovation Technology). This uncertainty forces organizers to use the DAO statute.

Second, section 17-31-105, states that DAO organizers must disclose a publicly available web link, called a “public identifier”, in their articles of organization filed with the state. (17-31-105). “Public Identifier” is not defined in the statute, but the legislative history shows that the drafters intended the disclosure to serve a public policy purpose. (Wyoming Select Committee on Blockchain). The drafters of the bill presumed the link would offer potential members transparency by making the blockchain code, also known as smart contracts, used to govern DAOs publicly available. Id.The statute requires the articles of organization be amended any time the computer code used to govern the DAO is changed, added, or removed. (17-31-107). The public policy purpose of transparency for requiring disclosure of a web link is not achieved under the current law. (Select Committee on Blockchain, Financial Technology and Digital Innovation Technology). Just because a link is publicly available does not mean that any lay person would be able to understand the code used to create smart contracts on a blockchain. Further, the statute does not define public identifier so there is no way to enforce quality and no guarantee that the code disclosed is source code. Alternatively, a public comment recommended that Wyoming adopt a more DAO specific rule by defining “public identifier” and requiring it to be kept up to date with the company’s registered agent. (LexDAO).

Third, the Wyoming DAO statute requires DAO’s to choose and disclose how the DAO will use smart contracts to manage, facilitate, or operate its business when the entity files its articles of organization. (17-31-104). The term “shall” in the statute means that the articles of organization must include a statement declaring how the DAO will use smart contracts at the time it is formed. Id. Prior to the March 8, 2022, amendment, the articles of organization form offered a check the box option for disclosing to what extent the organization would be managed by computer code. That rule was simple and standardized. However, the new articles of organization form, effective March 9, 2022, has a free form field where DAO’s are expected to explain how and to what extent the entity will use computer code to manage operations. (Wyoming Secretary of State). This represents another example of the burdensome reporting requirements imposed by the Wyoming DAO LLC statute.           

Finally, the Wyoming DAO LLC statute requires dissolution of the entity if a DAO takes no action for more than one year. (17-31-114). The legislative history shows that the purpose of Section 114 is to prevent DAO’s that are completely managed by code from harming consumers once there is no longer a natural person in control. (Select Committee on Blockchain, Financial Technology and Digital Innovation Technology). This arbitrary rule is not needed because two new provisions were added to the statute. First, DAO’s can no longer be completely algorithmically managed. (17-31-109). Second, DAO’s are required to be always in control of at least one natural person. (17-31-114). The mandatory dissolution provision exposes DAO’s to the risk that it could inadvertently and unknowingly lose limited liability protection. Section 104 is a source of potential litigation and liability for DAO’s registered or considering registration in the state because members could unknowingly be held personally liable for the company’s debts. These rules undermine the purpose of the statute by increasing legal uncertainty and therefore, stifling innovation.

In conclusion, Wyoming set out to create a statute for DAO’s to give organizers and the judiciary guidance on how to treat these entities if litigation were to arise in the future. (City DAO Interview). Since signing the DAO LLC Statute into law in May of 2021, about 500 DAO’s have registered in the state. (Wyoming Secretary of State).  There are an estimated 5,000 DAO’s in the United States. (Kramer Levin). Therefore, about 10 percent are registered in Wyoming. This metric seems to contradict that Wyoming is the most restrictive state to register these entities, however, it is more concerning because many of the DAO LLCs registered in Wyoming are not complying with the statute’s requirements outlined above. Until these rigidities are removed from the statute, DAO’s registering in the state will continue to be faced with the potential for personal liability for failing to follow corporate formalities or involuntary dissolution.