DAOs - a Legal Perspective
A Decentralized Autonomous Organization (DAO) is an organization with an unspecified number of members building their governance on blockchain technology.
As the name indicates, a DAO is administered on a decentralized basis and has no central management.
Members are granted participation rights by acquiring crypto tokens. Participation rights are not recorded in articles of association or agreements, but in computer code. Voting is undertaken and completed in accordance with pre-defined processes.
Is a DAO a simple partnership?
DAOs can be established for profit related or non-profit purposes. Members of profit related DAOs participate directly in the financial success of the organization.
Swiss law provides for several different company forms for profit related purposes. In particular, these include companies limited by shares (Aktiengesellschaft) and limited liability companies (Gesellschaft mit beschränkter Haftung). A simple partnership (einfache Gesellschaft) serves as the ‘default’ form.
Both companies limited by shares and limited liability companies must be registered in the commercial register in order to be established. The required minimum capital must also be paid in. Articles of association must be prepared, a registered office chosen, and members of the administrative and management boards appointed. A DAO does not usually meet these requirements.
In contrast, formation of a simple partnership only requires a contractual relationship between two or more persons, who combine their efforts and resources to achieve a common goal. The concept of a contractual relationship can be broadly interpreted and there is no prescribed form. The minimum requirement for the content of the contract is agreement about the common goal and the contribution obligations of the partners. These requirements are typically met by a DAO.
However, whilst the legal classification of a DAO as a simple partnership brings some legal certainty, this is not without some liability risks for the participants. Liability is not restricted to the company’s assets, as with a company limited by shares or a limited liability company, rather all partners are jointly and severally liable for all liabilities of the simple partnership.
For example, if a third party suffers loss through the activities of a DAO, it may in theory have recourse to the entire assets of each individual participant in a DAO. With this in mind, it is advisable to carefully weigh up the specific liability risks connected with establishing a DAO.
Is a DAO a collective investment scheme?
Where a DAO acts as an investment fund, the question arises as to whether the Swiss Federal Act on Collective Investment Schemes (CISA) applies. CISA defines collective investment schemes as assets raised from investors for the purpose of collective investment, and which are managed in the interests of such investors. They can be set up on a purely contractual basis, or in accordance with company law. Collective investment schemes require approval by the financial market authority (FINMA).
Under a collective investment scheme, the capital paid in is not managed by the investors themselves, but by a professional fund manager. Investors delegate both the management of the funds and investment decisions. In contrast, DAOs are normally set up so that all decisions are taken by an automated voting process on a decentralized basis, meaning that the assets are self-managed.
Whether a DAO is in practice self-managed must be determined on an individual basis. If this is the case, then the CISA will not apply. Otherwise, there is a risk of prosecution for creation of an unauthorized collective investment scheme.
What else needs to be considered when issuing DAO tokens?
Finally, when issuing DAO tokens, the FINMA guidelines on the qualification of tokens need to be followed.
FINMA distinguishes between payment tokens, asset tokens and utility tokens. Asset tokens represent shares in real assets or companies, or entitlements to dividends or interest payments. Asset tokens are governed by the rules on securities trading, if they are standardized to be suitable for mass trading.
Where the issue of a token is linked to a repayment demand, meaning that the amount paid for the token can be reclaimed by the token holder at any time, this could constitute a banking activity subject to a banking license.