On April 20, Tennessee Gov. Bill Lee signed into law a bill to allow decentralized autonomous organizations (DAOs), to register as a type of limited liability company. As the second U.S. state to grant legal status to DAOs (following a similar Wyoming law passed in 2021), Tennessee has become a trendsetter for blockchain-based corporate governance. This new DAO Act is expected to attract significant blockchain investment and job growth to the thriving tech sector in Tennessee. As one of the bill’s sponsors, House Representative Jason Powell, put it, Tennessee may soon be dubbed the “Delaware of DAOs.”
A DAO is an organization operating on a blockchain platform. Unlike a traditional LLC, which is governed by its operating agreement, a DAO is usually governed by:
When a legal entity is a DAO, each step of corporate governance and decision-making is automated through smart contracts and the participation of token holders. As a result, DAOs are self-sustaining and autonomous entities with a self-administering organizational structure and a correspondingly reduced need for manual administration when compared to traditional LLCs or corporations.
DAOs bring individuals across the world and their resources together for investment, mergers and acquisitions, nonprofit goals or other specific initiatives. For example, in February 2022, a DAO formed by a group of crypto enthusiasts raised $4 billion to acquire the Denver Broncos. Aside from the frictionless governance structure, another benefit of DAOs is, because they are truly decentralized organizations, most DAOs can issue tokens that do not meet the current definition of a “security” and thus are able to avoid potentially burdensome securities law compliance.
Prior to passage of the DAO Act, a DAO was not formally recognized as a unique governance structure, and therefore there was no easy way to establish a DAO structure that provided the benefits of recognized business entity structures, such as limitations on the liability of the equity owners. Without that protection, a token holder in a DAO that is not organized as another type of entity could theoretically be held liable for the debts of the DAO, even though the DAO actions were carried out automatically by a computer-run smart contract on autopilot without any human intervention.
The new DAO Act amends the Tennessee Limited Liability Company Act and allows an LLC to make an election to become a DAO. An entity may register in Tennessee as a DAO and carry on operations in other jurisdictions just like any other type of business entity. Forming a DAO in Tennessee requires the following:
Statement in the Articles of Organization
Name of the Organization:
The registered name for a DAO must include “DO,” “DAO”, “DO LLC”, or “DAO LLC.”
Governance Structure:
DAOs are poised to become a fast-growing type of business organization, sitting at the intersection among corporate governance, blockchain, cybersecurity and investment. According to the World Economic Forum, the value of assets held in smart contracts had grown to $13 billion by 2020. The Tennessee DAO Act is a significant step toward filling the gap between innovation and legislation.
Chris Sloan and Vivien Peaden are with Baker Donelson Bearman Caldwell & Berkowitz PC. Sloan is chair of the firm’s Emerging Companies Group, and Peadenis of-counsel in the firm’s Atlanta office. They can be reached at csloan@bakerdonelson.com and vpeaden@bakerdonelson.com.
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