California lawmaker wants to legitimize the incorporation of DAOs

Matt Haney, the California Assembly’s Democrat member for San Francisco, has submitted a bill to create a business category for Decentralized Autonomous Organizations (DAOs). Like all proposed legislation, AB 1229 isn’t yet law.

The bill limits DAO members’ obligations and liability for matters related to its operations. Administrators and agents could be held accountable under certain circumstances, such as taking responsibility for an obligation in writing, receiving a benefit from a contract, or executing a contract without the DAO’s approval.

The bill acknowledges that DAOs may form an LLC (many DAO token holders prefer to remain anonymous, and many LLCs are convenient anonymity shields). However, this avenue comes with limitations related to beneficial ownership reporting requirements as imposed by the federal Corporate Transparency Act.

Interestingly, the bill would also amend California’s corporations code to add ‘decentralized nonprofit associations’ (DNPAs). It defines a DNPA as an unincorporated association of at least 100 members “with a primary common purpose other than to operate a business for profit whose governance and operations are reliant, in full or in part, on a blockchain or other distributed ledger technology.”

Decentralization theater: OokiDAO’s precedent

Although many organizations use the word ‘decentralized,’ their actual decentralization is questionable. Indeed, decentralization theater is now a common phrase when attorneys discuss crypto matters.

SEC commissioner Hester Peirce coined the acronym DINO — Decentralized In Name Only — a play on words for both extinction-bound ‘dinosaur’ as well as the political RINO acronym circulating during that time.

Unless revised during the legislative process, AB 1229 allows the term decentralization to continue its ambiguous use. Ticking a couple of checkboxes — 100 members and use of a blockchain — allows any non-profit group in California to claim ‘decentralized’ status as a non-profit DAO.

Haney’s bill cites the legal and procedural morass of enforcing regulations against DAOs. It cited the OokiDAO lawsuit, for example, in which the CFTC legally served papers to the DAO’s members through a chatbot and a public forum. Haney claims that his legal framework would reduce complications in enforcing rules on DAO members.

Read more: Explained: CFTC proves DAOs are not ‘enforcement-proof’

In a separate class-action lawsuit involving a phishing attack in which bZx lost $55 million in assets, investors alleged that bZx was not a DAO but a general partnership. The presiding court dismissed motions to excuse bZx members from liability due to the lack of a distinct legal framework for DAOs.

California wants to welcome DAOs

Matt Haney introduced AB 1229, which will permit non-profit DAOs to register as decentralized nonprofit associations in California if it passes.

The bill passed the Assembly’s banking committee and will go to Judiciary Committee next week. AB 1229 could go to the governor’s office as early as September if it passes these legislative hurdles.

Supporters of the bill include the prolific crypto financier Andreessen Horowitz (a16z) as well as the Crypto Council For Innovation.

A16z general council Miles Jennings echoed Haney’s concerns that California could lose its competitive edge for innovation without a clear legal framework. Jennings said DAOs could search for friendlier jurisdictions without the passage of this bill.

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