Decentralized Autonomous Organization (DAO)

The Decentralized Autonomous Organization (DAO) as a Smart Contract-based Form of Organization

A Decentralized Autonomous Organization (DAO) is defined as an association that acts independently in the broadest sense and operates automatically via a smart contract on a blockchain suitable for this purpose. Decisions on activities of the DAO are to be made according to a mechanism defined in the underlying smart contract and subsequently executed in an automated manner by the smart contract. Members of a DAO are typically the bearers of the tokens issued by the underlying smart contract. They are entitled to participate in the decision-making of the DAO and thus direct its destiny and activities. Specifically, the governance of a DAO via the underlying smart contract can vary widely. For example, there may be token bearers with privileges or special obligations. It is also possible to specify how and when the voting process in a DAO is carried out in particular.

Securities Prospectus or WIB Required for the Offering of DAO Tokens?

Many legal questions are associated with the establishment of a DAO. For example, initiators must clarify right at the beginning whether a securities prospectus must be prepared for the issuance of the tokens, which must be approved by BaFin and subsequently published. This may be the case if the tokens embody rights similar to securities and are tradable and transferable without restrictions. For example, if holders of tokens can participate in potential profits of a Decentralized Autonomous Organization or assert participation rights like shareholders, this may lead to a legal classification of the tokens as securities. A tradability of DAO Tokens in the secondary market, for example by listing it on a crypto exchange, may also lead to the Tokens being considered a security in the regulatory sense. For the public offering of such tokens, the initiators of the project, for example, must then prepare a securities prospectus or at least a securities information sheet (WIB). The public offering of DAO Tokens may then only take place after the securities prospectus or the WIB has been approved by BaFin and published.

Can a DAO Be a Company According to German Corporate Law?

Initiators of Decentralized Autonomous Organizations must also clarify whether their DAO constitutes a company in the sense of private law. If this is the case, depending on the individual case, possibly unintended legal consequences may arise for the token holders. For example, if a DAO is a civil law partnership (GbR), the token holders as partners may have to assume liability for the organization’s debts with their private assets. Likewise, corporate law may result in additional funding obligations for the token holders in the event of losses. The establishment of a DAO should therefore be thoroughly prepared in advance and the rights of the bearers associated with the DAO Tokens should be carefully designed and defined in order to avoid unintended consequences under company law for the Token bearers of the Decentralized Autonomous Organization to be created.

The competent lawyer for questions concerning the Decentralized Autonomous Organization in our law firm is attorney Lutz Auffenberg, LL.M. (London).