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Another State Passed DAO Legislation

April 6, 2022

On April 6, 2022, Tennessee passed legislation to recognize and allow limited liability companies (LLCs) registration of “DAOs” in an effort to make “Tennessee the Delaware of DAOs”. According to State House Rep. Jason Powell, “With this new business structure, Tennessee will be a beacon for blockchain investment and new jobs… Just as Delaware became a hub for traditional LLCs or South Dakota for credit card companies.”

Tennessee is not the first state that desired to clarify the legal status of DAOs. On April 21, 2021, the Governor of Wyoming signed the DAO-focused Bill38 into law, making Wyoming the first state ever to recognize DAOs as LLCs, effective as of July 1, 2021.

What is DAO? DAO stands for decentralized autonomous organization. According to the Tennessee Revised Limited Liability Company Act (the “TRLLC”), the DAO’s articles of organization must contain a statement that the company is a DAO. The DAO’s name must include wording or abbreviation to denote its status, especially “DO”, “DAO”, “DO LLC.”, or “DAO LLC.”. Also, the DAO’s articles of organization may define the DAO either as member-managed or smart contract-managed.

The smart contract-managed DAO is a new kind of organizational structure, which is governed by an event-driven computer program that executes on an electronic, distributed, decentralized, shared, and replicated ledger that is used to automate transactions, including without limitation, transactions that (i) take custody over and instruct transfer of assets on that ledger, (ii) create and distribute electronic assets, (iii) synchronize information, or (iv) manage identity and user access to software applications.  With less human input, the smart contract-managed DAO is run by a set of algorithms, which ensures more efficiency and less hierarchy in the management and operations of this entity. Furthermore, in case of conflicts among the articles of organization, operating agreement, and smart contract, the smart contract controls (except for very few provisions under the TRLLC).

In addition, DAO is given more flexibility concerning its rights of members, which may differ materially from the rights of members in other LLCs.  DAO’s articles of organization, operating agreement, or smart contract, if applicable, may define, reduce, or eliminate fiduciary duties and may restrict the withdrawal or resignation from the DAO, or the transfer of ownership interests, return of capital contributions, or dissolution of the DAO.

In the business world, ownership interests in a DAO are commonly awarded crypto tokens that can be easily traded compared to traditional investment schemes.  The legalization of DAOs in Wyoming and Tennessee paves the broader road for more start-ups or the next generation of tech giants that desire to invest in cryptocurrency, NFT, or other emerging industries by DAOs.

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