The Wyoming DAO Act: Understanding Key Definitions and Legal Considerations

Overview of the Wyoming DAO Act, including key definitions and legal considerations for forming a decentralized autonomous organization (DAO) under this new law.

February 26, 2023

The rise of blockchain technology has led to the creation of innovative organizational structures like decentralized autonomous organizations (DAOs). These entities operate using smart contracts and computer code, rather than traditional legal agreements, and they have the potential to create decentralized systems that operate based on pre-programmed rules. The state of Wyoming recognized the potential of DAOs and was the first state to pass legislation recognizing them as legal entities. In this article, we'll explore the Wyoming DAO Act and the key definitions and legal considerations that practitioners should keep in mind when forming a DAO under this new law.

Key Definitions:

To understand the Wyoming DAO Act, it's essential to have a clear understanding of some key terms. The following are definitions of some key terms outlined in the Act:

DAO: A decentralized autonomous organization that operates through smart contracts and computer code. Quorum: The minimum number of members required to be present or vote on an issue in order for the vote to be considered valid. Membership interest: A member's ownership share in the member-managed DAO, which can be defined in the end-of-year articles, smart contract, or operating agreement. Open blockchain: A blockchain that is publicly accessible and transparent, allowing anyone to view the transaction history. Smart contract: A computer program that automatically executes the terms of a contract when certain conditions are met. Legal Considerations:

In addition to these definitions, there are several legal considerations that practitioners should keep in mind when forming a DAO under the Wyoming DAO Act. Here are some of the most important legal considerations:

Privacy: One of the main benefits of forming a DAO under the Wyoming DAO Act is privacy protection. Wyoming LLCs are known for their privacy orientation, with the Secretary of State not requiring the disclosure of much personal information. This privacy protection extends to DAOs formed under the Wyoming DAO Act.

Quorum: The Wyoming DAO Act sets a quorum of 50% of the membership interest for certain actions, which may be a challenge for some DAOs. To address this issue, an amendment has been proposed that would allow for flexibility in defining quorum based on when members participate, rather than who participates.

Membership Interest: The Wyoming DAO Act allows for the classification of membership interest as either a digital security or a digital consumer asset, giving members the ability to define which type of digital asset they want their DAO to be.

Open Blockchain: The Wyoming DAO Act requires that DAOs be formed on an open blockchain, providing transparency and accountability to members and investors.

Smart Contracts: The Wyoming DAO Act recognizes smart contracts as a legally binding form of agreement and requires that they be audited by a qualified third party to ensure their reliability.

Formation of a DAO in Wyoming:

Forming a DAO in Wyoming requires careful consideration of the legal requirements and potential challenges. Here are some of the most important requirements to keep in mind:

Naming Convention: The name of the LLC must include "DAO," "LDAO," "DAO LLC," or some combination thereof. While this requirement has been met with pushback, it is necessary to comply with the legal naming conventions in Wyoming.

Member-Managed: A DAO in Wyoming must be member-managed, which means that the active participation of the membership is required. This structure is intended to protect the members, but it raises questions about how far the elimination of membership rights can be taken.

Registered Agent: A DAO in Wyoming must maintain a registered agent, which is an in-state designated person or entity that serves as the source of contact with the Secretary of State. This requirement raises interesting questions about the relationship between a company and its registered agent, especially in the context of a fully distributed and potentially autonomous entity like a DAO

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