Utah “DAOs” and Don’ts: New Law Provides Limited Liability for Decentralized Organizations

While other states such as Wyoming, Tennessee, and Vermont have enacted legislation enabling decentralized autonomous organizations to be formed as limited liability companies, Utah is the first state to classify DAOs as a distinct legal entity – a limited liability decentralized autonomous organization. Key provisions of the Utah DAO Act are described below.

LLDs Defined

An LLD is an organization that exists as a set of rules encoded on a permissionless blockchain in one or more smart contracts. LLDs may have different classes of members but must be formed by at least one natural person.

DAO Governance

An LLD is primarily governed by the Utah DAO Act and the organization’s bylaws, except where both are silent the Utah Revised Uniform Limited Liability Company Act governs.

Traditionally, small privately-held legal entities, such as corporations, are not required to submit their bylaws to regulators. However, the Utah DAO Act includes unique protective measures governing an LLD’s software. For instance, the Utah DAO Act requires each LLD to provide the Utah Division of Corporations with evidence that its software code “has undergone quality assurance” and that it has a graphical user interface from which all transactions originating from, or addressed to, the LLD’s smart contracts can be monitored.

Liability of DAO Members

Members of an LLD are only liable for their on-chain contributions to the LLD. Members are not personally liable for the actions of other members nor are they personally liable for any of the LLD’s obligations in excess of its assets, except that LLD members who vote for the LLD to not comply with a court-ordered remedy may be personally liable in proportion to each of their shares of governance rights in the LLD.

Proxy Voting

The Utah DAO Act specifically permits any DAO member to be represented by a proxy who has the power to exercise all of the DAO member’s rights, including voting. However, the bylaws may limit a proxy’s power.

Next Steps

Our dedicated team of experienced attorneys is closely monitoring legal developments regarding DAOs and stands ready to answer your questions and assist in navigating this new frontier.