Updated: Wyoming Passes DAO Supplement Recognizing Decentralized Autonomous Organizations (DAOs) as LLCs | Practical Law

Updated: Wyoming Passes DAO Supplement Recognizing Decentralized Autonomous Organizations (DAOs) as LLCs | Practical Law

Governor Mark Gordon of Wyoming signed into law Wyoming Senate Bill 38 (the DAO Supplement), which addresses decentralized autonomous organizations (DAOs) – organizations managed by rules encoded in smart contracts that are built on distributed ledgers. By issuing the DAO Supplement, Wyoming became the first state to regulate DAOs and recognize them as a form of limited liability company (LLC).

Updated: Wyoming Passes DAO Supplement Recognizing Decentralized Autonomous Organizations (DAOs) as LLCs

by Practical Law Finance
Law stated as of 09 Mar 2022 • USA (National/Federal)
Governor Mark Gordon of Wyoming signed into law Wyoming Senate Bill 38 (the DAO Supplement), which addresses decentralized autonomous organizations (DAOs) – organizations managed by rules encoded in smart contracts that are built on distributed ledgers. By issuing the DAO Supplement, Wyoming became the first state to regulate DAOs and recognize them as a form of limited liability company (LLC).
On April 21, 2021, Governor Mark Gordon of Wyoming signed into law Wyoming Senate Bill 38 (Wy. Stat. § 17-31-101-115), which addresses decentralized autonomous organizations (DAOs) – organizations managed by rules encoded in smart contracts that are built on distributed ledgers, with minimal human input. By adopting the Wyoming Senate Bill 38 (the DAO Supplement), Wyoming became the first state to regulate DAOs and to recognize them as a form of limited liability company (LLC). The DAO Supplement became effective on July 1, 2021, and on that day, American CryptoFED DAO became the first DAO legally recognized in the US.
The DAO Supplement was created to provide liability protection for members of DAOs that are organized as Wyoming LLCs that may otherwise be personally liable for DAO actions and obligations. The DAO Supplement shields DAOs from being treated as general partnerships in legal disputes. While members of an LLC have a fiduciary duty to the organization, members of a DAO are subject only to the implied contractual covenant of good faith and fair dealing. DAOs are defined under the DAO Supplement as a Wyoming LLC whose articles of organization contain a statement that the company is a DAO. The DAO's articles of organization can either define the DAO as member-managed or algorithmically managed. Algorithmically managed DAOs may only form if the underlying smart contracts are able to be updated, modified, or upgraded.
The DAO Supplement requires that in order to be considered as a DAO LLC, each DAO must:
  • Include in its articles or organization the publicly available identifier for any smart contract directly used to manage, facilitate, or operate the DAO.
  • Amend its articles of organization if there is:
    • a change in the name of the DAO;
    • a false or erroneous statement in its articles of organization; or
    • an update or change to the DAO's smart contract.
  • Include either the abbreviations or wording (such as DAO, LAO, or DAO LLC) in its registered name to specifically denote its status as a DAO.
  • Continuously maintain a registered agent in the state of Wyoming.
DAOs may also be subject to federal regulation and must remain vigilant to comply with federal laws. In 2017, the SEC issued an investigative report which analyzed the application of federal securities laws to tokens issued by a DAO and warned all DAOs that the offer and sale of securities in the US must comply with federal securities laws (see Legal Update, SEC Issues Investigative Report Concluding Virtual Assets May Be Securities).
Update: On March 9, 2022, Governor Gordon signed into law legislation that amended the DAO Supplement. The major elements of the amendments:
  • Clarify the following key definitions:
    • "majority of the members" to mean more than 50 percent of membership interests eligible to participate in a vote to eliminate the requirement that a quorum participate;
    • "membership interest" to mean a member's ownership right in a DAO as determined by the articles of organization or the blockchain used by the organization rather than the member's share; and
    • "smart contracts" to mean an automated transaction or substantially similar analogue or code, script or programming language relying on a blockchain. (Wy. Stat. § 17-31-102).
  • Clarify that a DAO is not either "member managed" or "algorithmically managed" but may vary in the extent that it is member managed or algorithmically managed (Wy. Stat. § 17-31-109).
  • Allow the secretary of state to dissolve a DAO 30 days after formation if no publicly available identifier is included in papers filed with the secretary of state (Wy. Stat. § 17-31-105).
  • Clarify that a smart contract may constitute a DAO's operating agreement (Wy. Stat. § 17-31-108).
  • Clarify that management of the DAO is vested in the DAO members or in the DAO members and any applicable smart contracts (Wy. Stat. § 17-31-109).
  • Require any smart contract utilized by a DAO to be capable of being updated and modified (Wy. Stat. § 17-31-109).
  • Specify rights of members and dissociated members as well as how a person becomes a member and withdraws from membership in a DAO when the articles of organization, operating agreement or smart contract for the DAO do not provide that information (Wy. Stat. § 17-31-113).
  • Provide additional events that cause dissolution of a DAO, such as when all members of the DAO have withdrawn or the DAO is no longer controlled by at least one natural person, and provide a process to petition a court for dissolution (Wy. Stat. § 17-31-114).