Prop 1: DAO Incorporation

Neta DAO Proposal 1: DAO Incorporation

Status: Executed December 2022

Summary

This proposal requests authorization for a spend from the Neta DAO Treasury DAO (juno10l39ctnue4muf3fh4cmdcyr53c5h23vg6n4dyu0syx3lvkgwhlkqwkm6xz) in the sum of $9,500 USD to be paid to the MIDAO Directory Services, Inc., (hereafter ‘MIDAO Inc.’ or ‘MIDAO’, https://midao.org) to begin the process of incorporating Neta DAO as a nonprofit MIDAO LLC based in the Marshall Islands (hereafter, a ‘MIDAO LLC’).

The contract with MIDAO Directory Services Inc., is here: https://bafkreigozii2cagkmj5mrjgbsnneple4uuzndlcuejbfoaeuktcaqi4uqq.ipfs.nftstorage.link/

Incorporating Neta DAO as a MIDAO LLC provides the following advantages:

I. Limited liability protection for staking, subDAO, multisig, and other community members.

II. Corporate personhood for Neta DAO to open its own bank accounts, enter into off-chain contracts, and other ‘real world’ activities.

III. Clarification of the legal and tax obligations that Neta DAO must meet in order to operate, including the Marshall Islands’ nonprofit tax rate of 0%.

These advantages come with the following two restrictions:

I. As a nonprofit DAO LLC, Neta DAO is prohibited from distributing revenue to stakers.

II. MIDAO requires anyone with more than 10% control of Neta DAO’s governance to go through a KYC/AML process.

As a MIDAO LLC, Neta DAO will also need to maintain its LLC status with annual maintenance payments to MIDAO Inc, which will serve as Neta DAO’s Registered Agent in the Marshall Islands.

All such annual payments are $5,000 due in January of each year, starting January 2024.

Next Steps

After signing and paying the contract with MIDAO Inc., Neta DAO will need to establish an Operating Agreement and ratify it through a second vote.

To this end is proposed a provisional 30-day open “Assembly” of Neta DAO members who will commence work on the Operating Agreement on the successful passing of this proposal, but the exact duration and form of that work are for Neta DAO members to decide.

This Operating Agreement, once ratified, will then be submitted to MIDAO to finalize the incorporation and receive Neta DAO’s MIDAO LLC charter.

FAQ

Why elect a legal structure at all?

One of the three keys term in “DAO” is “Organization.” Setting up a proper legal structure is key to ensuring that an organization can both grow and responsibly manage its growth.

If the DAO does not set up a structure, then the default treatment in many jurisdictions—such as the United States—is to regard the collective pursuit of profit as a “general partnership” in which all members are individually and separably liable for the entire organization (i.e., as if every member were an owner with full ownership and responsibility for the DAO and all its liabilities, from taxes to legal challenges to regulatory compliance). This is a terrible choice for Neta DAO: it leaves members exposed to the whims of their local officials by misrepresenting Neta DAO as having an ownership class.

As $NETA was dropped by another team before Neta DAO even existed, and Neta DAO is an entirely volunteer effort made up of $NETA holders, the nonprofit MIDAO LLC solves the problem of liability and properly describes the DAO as ownerless (or owned by smart contracts) for any outside observers.

What does the prohibition on revenue distribution mean?

This stipulation is a covenant of being a nonprofit MIDAO LLC. This is actually how the DAO has functioned from the beginning, so this involves no change from the current system.

Note that this does not prohibit Neta DAO from paying members who actively perform work for the DAO, the conditions for which will need to be established in the Operating Agreement; it just means that Neta DAO is prohibited from paying out revenue as staking rewards.

Finally, it should be noted that this nonprofit structure may not be sufficient or desirable for all of Neta DAO’s activities in the future; dy/dx and others have recommended DAOs consider establishing both nonprofit and for-profit structures to best represent their activities, and MIDAO Inc., is currently working with the Republic of Marshall Islands to establish a for-profit MIDAO LLC. We will therefore continue monitoring our operations and the legal context for future opportunities as they develop.

What about the 10% KYC requirement?

As part of global anti-money laundering efforts, a MIDAO LLC charter requires that any staking member with greater than 10% control of the DAO’s voting power must be KYC’d with Marshall Islands’ Registrar of Foreign Investment. Anyone so KYC’d does not incur any special or additional liability for the DAO, and their identity stays with the Registrar in Majuro.At present, there are almost 4000 $NETA staked in the DAO, so that somene would need to stake more than 400 $NETA to trigger this condition. No stakers are currently over or in danger of exceeding this limit.

In the future, Neta DAO will need to implement a smart contract to continuously calculate the 10% limit and unstake any amount over it for addresses that have not been verified as KYC’d through the Marshall Islands. This will ensure Neta DAO abides by the charter terms as the total staked amount waxes and wanes.

Why not some other structure?

Research on Swiss, Cayman, and Panama Foundations, Wyoming and Vermont DAO LLCs, Guernsey special trusts, and other structures showed promise but were limited by high costs for initialization and maintenance; ongoing or unclear compliance requirements; and organizational rigidity and centralization not befitting a DAO, including the need for designated owners who assume liability.The Marshall Islands has crafted a structure that is designed for DAOs and that gives Neta DAO a solid foundation for long-term development in a space that will be increasingly filled with regulators and lawmakers.

Your Vote

By voting YES on Proposal #1, you support the use of $9,500 from the Treasury DAO to contract with MIDAO Directory Services, Inc., to form a nonprofit MIDAO LLC for Neta DAO.

By voting NO on Proposal #1, you disapprove of the proposal in favor of things remaining as they are.

By voting ABSTAIN on Proposal #1, you ABSTAIN from making a ruling.