As a business attorney I have noticed a concerning trend, DAO’s stiffing their service providers. In multiple instances, DAOs have solicited and received services from US service providers, but when the bills came due, they stopped responding. It begs the question, do DAO’s have a license to steal?
Who at the DAO is liable when the goal of the organization is to be fully decentralized?
Members of a DAO, which is an acronym that stands for “decentralized autonomous organization,” pride themselves on being a part of something different than just a legal entity doing business. DAO’s desire to be “decentralized,” with no one person in control or accountable. But if that is the case, how does a service provider do business with a DAO? Who at the DAO is accountable when the bills come due?
Turns out, to the chagrin of Generation Z, DAOs are actually not a new thing. They are just a new name, for an old thing, and that old thing is called a partnership or unincorporated association (at least in the US). A partnership and/or unincorporated association is a default legal status that is implied under a state’s statutory law, when any two or more persons go into business with each other, and have no other formal legal entity under which they are performing that business. Many people are unaware, but you do not even need to file paperwork to be treated as a Partnership or unincorporated association, and to fall under the statutory rules that govern them. By simply doing business with others, US state laws may imply a partnership or unincorporated association.
What does this mean for US DAOs? It means that every single member of the DAO is likely going to be held individually liable for any and all of the debts of the DAO, and could be subject to suit at any time – just like members in any other business partnership or unincorporated association. Unless you have been given and have executed paperwork that fully absolves you of any and all responsibility and/or liability of the DAO, you may be risking your personal assets when joining a DAO.
The concept of DAO as partnership or unincorporated association is just starting to work itself through the courts. In a leading case on the issue, CTFC v. OOkie DAO, the U. S. District Court for the Northern District of California decided in December of 2022 that OOki DAO was to be served process as an unincorporated association. However, perhaps no cutting edge, ground-breaking legal analysis is really needed anyways, since partnership and unincorporated association laws are already well settled in each state.
By Tiffany A. Donaldson, Esq.
© May 14, 2023