Second U.S. State Passes DAO Legislation
2024-09-24 11:36:14
On April 6, 2022, the Tennessee State Legislature passed a bill recognizing and allowing Decentralized Autonomous Organizations (DAOs) to register as Limited Liability Companies (LLCs), aiming to make "Tennessee the Delaware of DAOs." State Representative Jason Powell stated, "With this new business structure, Tennessee will become a beacon for blockchain investment and new job opportunities... just as Delaware became the go-to state for traditional LLCs and South Dakota became a hub for credit card companies."
Tennessee is not the first state to establish the legal status of DAOs. On April 21, 2021, the Governor of Wyoming signed Senate Bill 38, which centers on DAOs, making Wyoming the first state to recognize DAOs as LLCs. The bill took effect on July 1, 2021.
What is a DAO?
A Decentralized Autonomous Organization (DAO) is a decentralized, autonomous organization. According to the Tennessee Revised Limited Liability Company Act (TRLLC), a DAO's organizational documents must include a statement that the company is a DAO. Additionally, the DAO's company name must include words or abbreviations indicating its DAO structure, such as "DO," "DAO," "DO LLC," or "DAO LLC." Furthermore, the organizational documents may define the DAO as either member-managed or algorithmically managed.
An algorithmically managed DAO is a new type of organizational structure typically controlled and managed by event-driven computer programs that execute automated transactions on a distributed, decentralized shared electronic ledger. These transactions include, but are not limited to, (1) holding and directing the transfer of assets on the ledger, (2) creating and distributing digital assets, (3) synchronizing information, or (4) managing identity authentication and user access to software applications. Algorithmically managed DAOs are essentially operated by a set of algorithms, minimizing human intervention and hierarchical management, ensuring more efficient governance and operations. In cases of conflict between the organizational documents, operating agreements, and smart contracts, the smart contract prevails (with limited exceptions under the TRLLC).
Moreover, DAOs offer greater flexibility in member rights, with significant differences compared to traditional LLCs. A DAO's organizational documents, operating agreements, or smart contracts (if applicable) may define, reduce, or eliminate fiduciary duties of members. They may also restrict members from withdrawing or resigning, transferring ownership interests, receiving capital returns, or dissolving the DAO.
In the business world, DAO ownership interests are often granted through crypto tokens, which provide greater transactional freedom compared to traditional financing models. By enacting legislation to legitimize DAOs, Wyoming and Tennessee have paved the way for more startups and next-generation tech giants looking to invest in cryptocurrencies, NFTs, or other emerging fields through DAOs.