Discussion on the Legal Structure of DAO: Starting from the Lawsuit Against DAO by US Regulatory Authorities

Recently, Ooki DAO has been sued, and its members may need to bear joint responsibility. This event, although shocking, has long been anticipated in the legal community. In fact, DAOs are not outside the law, and when legal responsibilities arise, the lack of a physical entity can pose significant risks to its members. As a result, many DAOs are seeking to establish more mature legal structures. Depending on the different business characteristics, several forms such as limited liability companies, foundations, non-profit associations without legal personality, and special purpose trusts have become common choices.

Part One

The U.S. Commodity Futures Trading Commission (CFTC) recently announced enforcement actions against the DeFi protocol bZx. The CFTC accused the protocol of illegally offering leveraged and margined futures trading, engaging in activities that can only be conducted by registered futures commission merchants, and failing to implement financial regulatory requirements such as KYC. As a result, the CFTC filed a lawsuit against bZeroX, LLC and the two founders of the bZx protocol, proposing a settlement fine of $250,000 for each party.

At the same time, the CFTC decided to file a civil lawsuit against the DAO behind bZx. This is because on August 23 of last year, the bZx team transferred control of the protocol to bZx DAO (which was later renamed Ooki DAO) in an attempt to evade regulation. The purpose of the lawsuit includes seeking damages, returning illegal gains, civil fines, and prohibiting them from trading, registering, and other actions that violate relevant regulations.

This action has triggered widespread criticism in the Web3 community, and there are even divisions within the CFTC. CFTC Commissioner Summer K. Mersinger publicly expressed her opposition, arguing that the decision lacks clear legal basis and has not adequately sought input.

This article will focus on the legal structure of DAOs and the corresponding responsibilities.

The CFTC's action has caused a huge stir in the DAO space, primarily because the DAO members behind the bZx protocol may need to bear legal responsibility directly. Currently, the standard for determining whether someone is a member is whether they have voted in the DAO, as voting represents an influence on the operation of the organization. Although this seems somewhat unreasonable, the legal community has long warned that if a DAO does not have a legal entity, it may be classified as a general partnership when responsibility needs to be assumed, resulting in all DAO members needing to bear unlimited joint liability. This is one of the main reasons why various DAOs are actively pushing for entity registration.

Although most people were aware of this risk before, very few actually believed that DAO members would be held jointly liable. On one hand, many community-based DAOs have not even established basic operations and consider the risks to be minimal. On the other hand, enforcing penalties against DAO members is extremely difficult. Most DAO members are anonymous, with only one address. How do you track them, and how high are the enforcement costs? Unless it is a major case that requires FBI involvement, very few would expend a lot of effort to trace anonymous addresses scattered across the globe for minor fines. Even if only the addresses that voted are pursued, there are generally hundreds of them. Everyone believes that the law does not hold the group accountable and that they have no wrongdoing.

While this incident sets a dangerous precedent, it may be more bark than bite, primarily aimed at deterring operators of DeFi protocols and warning them not to think they can escape responsibility by handing over operational authority to a DAO. The CFTC also mentioned in its statement that these actions are part of their broader efforts to protect U.S. customers in the rapidly evolving decentralized finance landscape.

This incident made people more clearly aware of a fact: under the current legal system, DAOs need to and will be required to bear corresponding legal responsibilities.

Therefore, for DAOs, forming a more complete organizational legal structure as early as possible has almost become a necessity. (Of course, some DAOs may insist on a purely crypto-native approach, rejecting regulation and achieving censorship resistance through various designs. Such DAOs will inevitably exist in the crypto world for a long time, but may not become the mainstream form.)

Reviewing the main disadvantages of not registering an entity again:

1. A non-entity DAO may be classified as a general partnership, and members may be required to assume unlimited joint liability under certain circumstances. This is exactly what is happening in the bZx case.

2. There are tax risks; under circumstances where there is no physical entity, members may need to assume tax liabilities that do not belong to them, even if the individual has not received any benefits.

3. Off-chain activities are restricted, and it may be difficult to interact with entities in the traditional world, such as signing contracts, when there is no physical entity. Many DAOs have already expanded their business into the off-chain world.

Any of the above issues could have a significant impact on the long-term development of the DAO.

Part Two

If you want to register, where should you register, and what type should you register for?

The following lists some common solutions for reference:

Limited Liability Company ( LLC )

In the United States, a DAO can be registered as a limited liability company (LLC), making it fully compliant with U.S. laws and subsequent tax requirements. Limited liability companies in the U.S. can be member-managed and do not require a board of directors, managers, or leaders, which makes LLCs very suitable for DAO usage. States like Delaware and Wyoming have explicitly accepted the registration of LLCs in the form of DAOs.

LLCs can be established for profit, and those that choose to register as LLCs are mostly investment DAOs. Although there are currently no clear regulatory guidelines, they typically require members to be accredited investors and limit the number of members to 99. This way, even in the face of future regulations, compliance can be maximized.

Some investment groups register as LLCs but define themselves as Investment Clubs (. This can be seen as a lower-tier version of a Venture DAO. The SEC has clear regulations on what types of groups can be considered investment clubs, and qualifying investment collectives may be exempt from SEC regulation. However, investment clubs also have a limit of 99 members, and the most troublesome part is that all members must actively participate in every investment decision. Even if just one member does not participate in a particular investment matter, it could be deemed a violation by the SEC.

Recently, some organizations have proposed the concept of sDAO, which allows the member limit to be increased to 499 people under compliance conditions and to engage in specific categories of investment, but requires all participants to be U.S. citizens. In contrast, LLCs have no nationality restrictions on members. This proposal is still in the verification process, and there are not many details available.

At the beginning of this year, the Marshall Islands revised the Non-Profit Entities Act, allowing any DAO to register as a non-profit limited liability company in the country and enjoy tax exemptions. The law permits registration in cases where a single individual assumes responsibility for the entire DAO. This is an offshore version of the U.S. structure but is not subject to U.S. federal law. Although the Marshall Islands LLC can conduct business activities normally, it cannot distribute income or profits to DAO members, and therefore is not suitable for investment-type DAOs.

) Overseas Foundation

Compared to registering as a limited liability company, more DAOs currently choose to register foundations in different locations around the world. The advantage of a foundation is that it can be "ownerless," which can reduce the legal liability of the founding team in case of unexpected situations. Common registration locations for domestic foundations are Switzerland and Singapore. They offer good legal protection, but DAOs need to pay taxes on income. Offshore registration locations are often in places like the Cayman Islands and BVI. Among these, the Cayman Islands are relatively friendly to token issuance, which is also the choice for quite a few DAOs at present. The main difference between domestic and offshore is that offshore registration locations have tax exemptions. Foundations are managed by a council or board of directors, which sacrifices some degree of decentralization, but token holders can guide the actions of the council or board through voting. Foundations have been widely used by blockchain-related organizations before the popularity of DAOs, and people are relatively familiar with this model.

Limited Cooperative Association ###LCA(

LCA is a hybrid of traditional cooperatives and limited liability companies ) LLC (, offering greater flexibility than traditional cooperatives, especially in terms of investment. LCA can effectively structure the governance agreements of a DAO and the bylaws, accommodating the voting rights of different types of participants while adhering to cooperative principles. Colorado has a relatively well-developed set of statutes regarding LCA, thus gaining recognition from many DAOs.

) Unincorporated Nonprofit Association (UNA)

UNA is a new form that has been a key exploration in the past year. UNA allows for very flexible member recognition, permits anonymity for members, and facilitates easy mobility, which aligns well with the characteristics of existing community-based DAOs. UNA can operate profit-making businesses, but the entire organization needs to maintain a non-profit status, as profit distribution is not allowed. However, UNA is a relatively new practice, and the understanding of UNA varies across different states in the United States, lacking corresponding case law, which may lead to situations where UNA is not recognized and thus creates risks. Additionally, UNA is more suitable for DAOs that primarily rely on key personnel and business activities based in the U.S., and the organization must pay taxes in the United States.

special purpose trust

The form of a special purpose trust generally involves the DAO transferring part or all of its assets to a trustee and entrusting the trustee to conduct business activities through a trust agreement. This not only addresses the issues of offline entities but also provides limited liability protection for both DAO members and the trustee. One of the main issues with introducing a legal structure into a DAO is that adhering to regulations designed for traditional organizations may undermine the decentralization and freedom of the DAO. In particular, the vast majority of legal structures require government approval to be completed. However, a special purpose trust established under Guernsey law eliminates this issue. It does not require government approval or ongoing reporting. The trust becomes effective upon the transfer of assets according to the trust agreement. However, the application scenarios for special purpose trusts mainly involve representing committees or SubDAOs within the DAO to conduct specific business activities, while wrapping the entire DAO as a trust structure remains to be explored.

All the solutions discussed above address the three initial problems raised. However, each solution has its own characteristics based on this foundation. The legal structure of a DAO often involves complex factors that need to be considered in practical design, including the countries or regions where the main participating members are located, the desired governance structure, the degree of decentralization, the main business direction, the scale and sustainability of the DAO's members, token strategies, SubDAO strategies, registration costs, etc.

The legal structure and related practices of DAO are an emerging field that has not yet formed a general consensus and best practices, requiring further exploration.