Wyoming is a Blockchain Country
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On March 7, 2024, SF50, the Wyoming Decentralized Unincorporated Nonprofit Association Act was signed into law. The latest act is the most recent in Wyoming’s effort to become the US’s most friendly toward crypto companies. SF50 was cheered by many in the decentralized community, with a16zcrypto claiming the DUNA has created “An Oasis For DAOs”.
But what does the DUNA actually mean for on-chain organizations, and how likely is it that a DUNA is the right legal entity for your DAO? Here we explore a few ins and outs of the new legislation, and unpack what it might mean for blockchain businesses everywhere.
What is a DUNA?
The law establishes a legal framework for “DUNAs”, unincorporated nonprofit associations which leverage blockchain and distributed ledger technology. It was modeled on the state’s existing Unincorporated Nonprofit Association Act, with added adaptations for decentralized organizations.
DUNAs are defined by their technology, membership, and activities.
Technology
First, DUNAs must operate as entirely decentralized organizations, and their operation must depend on blockchain technologies. The legislation emphasizes how smart contracts, digital assets and distributed ledgers must serve as the foundation of the association’s governance, including how operations, member rights and administrative roles are managed.
Membership
These collectives must have 100 or more members, who are joined by mutual consent for a common non-profit purpose. The legislation does not define how those 100 members are identified or counted, and there is no requirement for KYC procedures. It is not clear how courts will define the membership threshold in practice.
Activities
The law defines that DUNAs must have a “charitable purpose” behind their activities, specifically those that may be considered exempt under the International Revenue Code’s 501(c)(3) legislation (which is limited to religious organizations, educational, scientific, sports organizations or the prevention of animal and child cruelty), or upon dissolution may disperse their funds to a charitable purpose. For many for-profit blockchain businesses, at first appearance a non-profit designation might already appear as a barrier. However, under this legislation, DUNAs can engage in for-profit activities and reasonably compensate members for their contributions, as long as those profits continue to support the growth and sustainability of the DAO and its underlying blockchain network. Dividends and profits can be distributed to its members, but not to those outside.
Furthermore, to be eligible as a DUNA, organizations must be unincorporated, and not formed under any other preexisting law or legal structure. Organizations that have another type of legal wrapper cannot apply to become a DUNA association. This feature brings us to the aspect of the law that has received the most attention.
A true legal entity for DAOs?
One of the most discussed aspects of the DUNA legislation is the basis for legal recognition and protection for DAOs. What this means in practice is that DUNAs are recognized under the law. DUNAs should function as any other business, they may work with third parties, open bank accounts and work with contractors. DUNAs may acquire property, and be the beneficiary of a trust or contract. This legal recognition gives DUNAs a tax structure similar to a corporation, which may simplify tax obligations and make it easier for decentralized organizations to work with regulatory authorities.
Most importantly, it also suggests that a DUNA’s members, managers or administrators may not be held liable for a breach of a DUNA’s contract because of their association with the DUNA. This is notable as founders and contributors of DAOs, including Wyoming based DAOs, have been found personally liable for securities violations and other types of infractions enacted by DAOs.
Should all DAOs become DUNAs?
According to a16zcrypto and others, DAOs should embrace and adopt the DUNA. Without a legal entity, they cite that “DAO membership and participation is currently fraught with peril”, and that the new legislation prevents the onslaught of class action lawsuits and regulatory actions that DAO members may be subject to without a proper legal structure. They also argue that it simplifies the tax implications for decentralized organizations and helps to empower DAO members to further contribute.
However, there are a number of reasons on-chain organizations should be cautious before wholeheartedly embracing the DUNA. As a new legislation, it remains untested. Earlier DAO legislation passed in Wyoming meant to legally recognize DAOs so they could comply with securities laws famously was unable to do so, and had significant consequences for some DAOs that enthusiastically supported the new legislation.
There are several areas where the DUNA legislation appears unclear and may be tested in court. These include:
Fair compensation
DUNAs can compensate members for their contributions, however compensation must be deemed “reasonable”. It is unclear how courts will consider what type of compensation is reasonable, which might limit the amount that DUNAs can extract from users and distribute to their members. It might mean that DUNAs will have to adapt their compensation models and vesting schedules to comply with expectations of reasonable compensation. It is likely that there will be a ceiling of what type of compensation is considered reasonable. According to the Wyoming Nonprofit Network’s latest Impact Report, $640 million was paid in wages to 16,856 nonprofit sector employees across Wyoming in 2021. This suggests the average compensation for employees in the nonprofit sector is quite low, with many participating in a voluntary capacity.
Nonprofit designation
DUNAs can operate in a for-profit capacity, but they must be designed in a way to facilitate overall ambitions that advance non-profit objectives. This might mean that grant programs and more open access opportunities may become more prominent in a DUNA’s operations. The requirement for a charitable purpose might have other consequences that are yet untested by the courts.
Legal and regulatory uncertainty
The DUNA was designed to address the shortcomings of previous legislation that was unable to shield DAOs from regulatory oversight. However the regulatory landscape is continuing to change and there are aspects of the legislation that do not clearly outline how DUNA will interact with other US regulations. Due to the principle of supremacy in US law, federal laws, such as SEC regulations supersede that of state laws, such as Wyoming’s DUNA. This might be complicated if DUNAs engage in activities that fall under regulatory scrutiny. For example, should the DUNA issue tokens that are considered securities or operate in the financial sector, they may need to implement KYC procedures to comply with relevant laws and regulations, whereas the Wyoming law has no such requirement. Organizations that become DUNAs, will be subject to all SEC and federal requirements, as even though they may be decentralized, as legal Wyoming companies they are considered US based entities.
Further Considerations
Despite it’s potential limitations, Wyoming’s new DUNA legislation is a promising step for DAOs and on-chain organizations. Its passage suggests a greater openness of legal authorities to take decentralized businesses more seriously, and gives other localities a reference for how to work more meaningfully with decentralized organizations. The DUNA joins developments by more and more jurisdictions that have developed legislation to create alternative avenues for DAOs and other on-chain businesses to pursue legal recognition. It’s important to remember that many of these are new and still remain untested. It is up to DAO builders and members to do their own research about what type of legal entity is right for their organization, and to be aware of the changing regulatory landscape. We look forward to following the developments of DUNA, and seeing how DAOs utilize this new law.
We will continue to follow the efforts by other jurisdictions to adopt alternative legislation for DAOs and to see how the regulatory landscape evolves in response. If you’ve pursued a DUNA for your on-chain organization and would like to tell us about your experience, please get in touch, we’d be happy to share your experience for other DAO builders. Let us know!
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Colony makes no recommendation as to a specific jurisdictional setup for your DAO or on-chain entity, besides to encourage all DAOs to seek a legal setup that is appropriate. Please do your own research on what arrangement is most suitable. Consult appropriate legal advice before pursuing any legal arrangement.
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