Author: Jacqueline Radebaugh, Yev Muchnik

Autonomous entities like decentralized autonomous organizations (DAOs) are unique and largely incompatible with traditional U.S. legal entities.

There is currently a lack of new legal entity structures to meet the new needs of DAOs. In this article, we explore why the current Limited Cooperative Association (LCA) may provide the most ideological legal framework for DAOs.

The LCA incorporates cooperative principles and values ​​similar to the DAO core principles and provides a legal framework for DAOs seeking to incorporate some or all of their related activities into a legal structure.

#1 Evolution of Company Forms

Corporations are one of the most important inventions in history. Corporations allow people to create entities that are legally distinct from themselves, while giving those entities rights similar to natural persons, including the ability to own assets, pay taxes, enter into contracts, and have a legal status independent of the owner.

Cooperatives, as a form of corporation, have been a part of the American economic landscape since the 18th century, but modern cooperative organizations began to flourish in the 19th century. Cooperatives span all business sectors, from producers to consumers, workers to multi-stakeholder and multisectoral cooperatives, and now exist in the digital realm as “platform cooperatives” such as Stocksy United[1], Savvy cooperative [2] and Fairbnb. coop [3].

Cooperatives differ from other corporate models in that cooperatives are formed by and for members. Even with investor participation, a cooperative must be controlled by its members, and members must participate in the governance of the cooperative. At the end of the day, a cooperative is a business owned and controlled by the people who use it, so it differs from a traditional business organization.

The first formal set of co-operative principles was the Rochdale Principles of 1844, which led to the following principles defining co-operatives:

• voluntary and open membership,

• democratic member control (control of the organization by members),

• economic participation of members (profits and losses arising from activities of members),

• autonomous and independent (not controlled by investors),

• education, training and information (on cooperative management training and political values ​​of cooperative alliances),

• cooperation among cooperatives,

• A concern for the community.

DAOs represent a further evolution of the corporate form, facilitating the creation of disintermediated communities and networks in which participants control decisions and their assets. There is currently no consistent clear legal definition of a DAO, but, at its most basic level, a DAO is an agile group of people acting together in a joint venture with a common purpose. Given the commonalities between DAOs and traditional cooperatives, we believe cooperatives are the safest and most ideologically appropriate corporate structure for DAOs.

#2 Colorado Cooperative

The latest beneficial update for collaborative organizations, especially DAOs, comes from Limited Associations (LCAs).

An LCA is a hybrid of a limited liability company (LLC) and a corporation. It is an entity established on the legal basis of an unincorporated entity. Like an LLC, it allows investor members to distribute investment returns to sponsors and non-sponsors, as well as voting rights to investors, while adhering to the principle of cooperation. It differs from an LLC in that its distribution of financial rewards is based on sponsorship activity, voting is based on membership (one member one vote) or sponsorship, and allows for the integration of DAO governance principles such as furious quits and quadratic voting.

Just as startups from around the world choose Delaware as their jurisdiction to incorporate or form their companies, so do DAOs and Colorado.

The DAOization of the coordination of decentralized resources may be the most natural fit for Colorado's cooperative statutes, specifically the Uniform Limited Cooperative Associations Act (CULCAA). And, just as startups from around the world choose Delaware as their jurisdiction of incorporation or formation, so do the DAO and CULCAA. You don't need to live in Colorado, or even the US, to form a Colorado LCA [4], which makes it more suitable for a global decentralized network [5].

CULCAA's principles overlap with those of the DAO:

• They applied the original Rochdale-principle networks (listed above) to modern affinity networks and developed a set of permission rules.

• They are based on the principle of democratic voting.

• They confer limited liability on their members and facilitate the use of organizational resources.

• They have the ability to embed features of autonomous governance in governance documents.

• They have the ability to raise patron capital and issue digital tokens as patron-linked units of account[6], with limited state and federal securities registration exemptions built in.

• And more critically, the DAO governance protocol can be structured in the charter of the cooperative, allowing token-based quorum voting, holographic consensus, permissioned relative majority (Moloch DAO) voting or conviction voting. In fact, decisions can happen both on-chain and off-chain, with "big decisions" being recorded, or simply recorded on-chain.

#3 Turn DAOs into cooperatives

Colorado's cooperative charter can be used in any industry, with groups already formed in industries ranging from retail to housing, from construction to craft beer. The Colorado DAO Cooperative, in the form of an LCA, already exists for freelancers, NFT holders, environmental incubators, and other worker and project-based initiatives.

Here are examples of different types of traditional co-ops and how they could be adapted for a DAO:

• Consumer Co-ops: These co-ops sell goods and/or services to members, similar to the popular outdoor goods co-op REI. DAO example: A DAO of NFT buyers, perhaps similar to the Flamingo DAO, establishes a cooperative for buying NFTs. These NFT buyers are members of the DAO, and they can in turn buy NFTs directly from the DAO.

• Producers' Cooperatives: These cooperatives are often structured as a sales or marketing tool for their members. DAO example: NFT artists form a cooperative, they are members of the cooperative, and then create NFT together. The cooperative sells art on behalf of the artists and distributes the proceeds to the artists.

• Workers' cooperatives: These cooperatives employ workers, either employees or independent contractors. DAO example: Designers form a co-op, they are members of the co-op, this co-op contracts with 3rd party projects, similar to how Raid Guild and dOrg work. Designers are paid hourly for their contribution to the co-op's work, as well as sponsorship distributions of the surplus (profit after fees) from their labour.

• Buying or Shared Services Cooperatives: These cooperatives act as B2B collective buying vehicles for their members (usually legal entities). DAO example: Small cryptocurrency companies form a cooperative through which they can receive benefits for their employees at substantially reduced rates.

• Multi-stakeholder cooperatives: These cooperatives combine two or more categories of members, including those from different types articulated earlier. These members have different roles and interests in it and benefit all at the same time. DAO Example: Similar to the worker cooperative described above, it could allow a class of non-designer members, such as a consumer or investor class.

A DAO can use a cooperative structure for all or some of its activities, which can be disassembled or packaged into different legal entities for different operational purposes, such as licensing, rights to hold intellectual property, hiring employees and contractors, Distribute grants or pay taxes, etc. This effect can also be achieved through a joint cooperative, which is a cooperative of member cooperatives [7]. Under this structure, various activities can be dispersed among the different member cooperatives serving the core cooperative.

#4 Current DAO cooperation use case based on ULCAA

Two recent examples of our work with DAOs are Job Commune and SongADAO.

Employment Commons LCA

Employment communes LCA ("commune") is structured as a multi-stakeholder shared services cooperative. The express purpose of this DAO cooperative is to create a decentralized technical and legal framework supported by employment cooperatives and philanthropies with a sustainable purpose that aligns incentives for ecosystem participants better with sustainable, user-friendly driven, web-based utility employment infrastructure [8].

There are two types of members in the commune: employees [9] and union members [10]. Employees are individuals who use the legal shield of an LLC or corporation to provide services to other businesses (such as independent contractors) and join the DAO cooperative, thereby receiving wages and related employee benefits such as health insurance.

The business activities of the communes are similar to those of professional employer organizations (PEOs), where DAO cooperatives function as cooperative employers. By acting as a common employer for its members, it can negotiate on behalf of these members for employee benefits, tailoring incentives for traditional employment sectors. Affiliate members, on the other hand, are individuals or entities that meet the sponsorship requirements of the DAO Cooperative, and they recommend new employee members, thereby expanding the network effect of the DAO Cooperative. The DAO Cooperative rewards both categories of members with a token called $WORK, a unit of account tied to wages designed to reward all members of the communal ecosystem.

SongADAO

The business purpose of SongADAO is"Help "Song of the Day" be heard by as many people as possible and spread the creative meme of the day.[11] SongADAO is structured as a consumer cooperative. The artist founders of the DAO cooperative create songs every day and transmit them to the DAO. The DAO minted these songs into NFTs, and then sold the NFTs to consumer buyers. Consumers who are willing to let the platform verify their identities are eligible to become members, and can also become members with voting rights. Both membership tiers are consumer tiers, but providing identifying information will determine their voting rights and whether they can vote on the use of the DAO cooperative's treasury funds.

While innovating in adopting DAO values ​​in their structure and form, the activities of these DAO cooperatives can also be translated into more sophisticated forms of cooperative business activity and entity-member relationships.

#5 Is the LCA structure a blueprint for an accountability-resistant DAO?

The digital community has sounded the clarion call to create and codify a new legal framework to meet the needs of the Internet or smart contract governance community to provide digital legal personality, limited liability protection, division of fiduciary responsibility, and the issuance of compliant tokens and clear guidelines for handling community finances.

Until this framework is established, we believe the LCA cooperative structure is the best and most flexible legal option for many DAOs. Coupled with other solutions (such as a community legal compensation fund and/or self-insurance insurance), the LCA model would allow DAOs to stay true to their ideals while remaining in a safe legal position. We will continue to explore and develop solutions based on this structure.

We hope this article serves as a reference and provides you with an initial guide to DAO cooperatives. However, in our experience, pure cooperatives, pure DAOs, and DAO cooperatives can never be fully generic, and you will need to discuss their specific structures with an experienced attorney to address issues specific to your DAO and entity design.

Jacqueline Radebough is an attorney with Jason Wiener PC in Boulder, Colorado. Yev Muchnik is a securities attorney in Denver, Colorado.

references:

references:

[1] It offers a "highly curated collection of royalty-free images and video clips".

[2] A multi-stakeholder owned research cooperative that enables industry and start-up technology companies to easily conduct user research with patients to ensure that products entering the market are patient-centred and focused on patient needs.

[3] A more just and equitable alternative to Airbnb.

[4] See Jason Weiner, Linda Phillips, Colorado -- "The Delaware of Cooperative Law," The Benefits of Forming Workers' Cooperatives in Colorado, 55. Employee Ownership News (May 29, 2018), https://medium.com/fifty-by-fifty/colorado-the-delaware-of-cooperative-law-babedc9e88eb

[5] We believe that these communities need not be concerned with differing laws from state to state; they can operate in any state and still be organized under Colorado law, in which case they must take the form of a foreign entity in the state where they have employees, but The interior is subject to Colorado law.

[6] In cooperatives, a patron is a person who buys (or uses, or sells, or provides) products or services from (or to) a cooperative.

[7] A united cooperative can serve as a central agency providing services to cooperative members (e.g., human resources, accounting, industry training, providing services to members of all cooperative entities), as a centralized purchasing department (e.g., buying paper, or goods or services that all other members require for their own business), and other uses that utilize the collective resources and energies of the members of the cooperative.

[8] According to the Articles of Association.

[9] Defined as a limited liability company or other corporate legal entity that meets membership requirements.

[10] Defined as a natural person or entity that meets the membership requirements.

[11] As stated in the Bylaws adopted on 11 May 2021.