The Wyoming Decentralized Unincorporated Nonprofit Association Act, Section-by-Section

Wyoming this week enacted the DUNAA, the “Wyoming Decentralized Unincorporated Nonprofit Association Act,” which created a new type of corporate form called DUNAs or “Decentralized Unincorporated Nonprofit Associations.”

I have read the entire DUNAA so you don’t have to. Long story short: this Act means that token mergers, converting token projects into corporations, and smart contracts which are legal contracts all just jumped off the drawing board and into real life.

This proposal is significantly more crypto-native in its orientation than prior attempts, chiefly the Vermont “Blockchain LLC” and the Wyoming DAO LLC.

Critics will say that changes this sweeping likely create a huge new realm of legal uncertainty, particularly in terms of applying traditional contract law principles to hard-coded arrangements with no accompanying explanatory language, and those critics are right. However, we lawyers should celebrate nonetheless, for two reasons – (a) if this catches on, it’ll generate gigatons of corporate legal work in crypto and (b) there is nothing more exciting than the creation of truly new law.

Because of the manner in which this law takes courses of dealing in crypto and allows companies to formalize these understandings and confer limited liability on their members, it is arguable that this law could constitute one of the most radical changes in corporation law since the invention of the Internet. It is quite un-arguable that this is the first serious attempt to take blockchain organizations which mimic the functions of a corporation, but aren’t corporations, and allow them to avail themselves of certain protections afforded to corporations in a crypto-native way – keeping in mind that this is the very thing that DAOs and their predecessor concept, “Decentralized Autonomous Corporations” or DACs, have been trying, and failing, to do for ten years.

Obligatory Dune meme before we start, and for the Twitter thumbnail:

Section 101 – Short title.

Title of the bill.

102 – Definitions.

The big one for present purposes is “governing principles” which means:

“All agreements and any amendment or restatement of those agreements, including any DUNA agreements, consensus formation algorithms, smart contracts or enacted governance proposals, that govern the purpose or operation of the DUNA and the rights and obligations of members and administrators, whether contained in a record, implied from the nonprofit association’s established practices, or both.”

This is no ordinary legalese. To anyone familiar with the history of smart contract theory and practice, by which I mean its entire history dating back to the 1990s rather than the Ethereum genesis block in 2015, this is sweeping, revolutionary language which I thought I would never see a government enact in my lifetime when we built the first Eth DAO prototype on testnet and proposed putting a legal wrapper around it in 2014.

What this language means – as used in the other provisions of the Act, recited below – is that a Wyoming DUNA may say that “the smart contract is the contract” without actually needing to provide plain-language equivalents. This, to my knowledge, is the first time this has ever been done and shows that the drafters are very familiar with the wet-code (language and court-based enforcement)/dry-code (software and automatic, cryptographically secure, self-executing enforcement) problem that the smart contract community has been talking about ever since it was first formulated by Szabo in 1997 and expanded on in 2006, decades before Ethereum even existed.

The problem, stated plainly, is that unless and until a law says otherwise, the usual basic position on the legal enforcement of smart contracts is that smart contracts aren’t contracts in the traditional sense, as it is arguable that they lack all of the necessary constituent elements of a contract and as such are not capable of embodying a contractually binding understanding. Wyoming, giving zero fucks, just steamrolled right over the wet code/dry code problem by incorporating “dry code” into “wet code” by reference where DUNA membership contracts are concerned.

If you join a DUNA, and the only contracts it has are hard-coded, this law says that, for the purposes of the DUNAA, that is the agreement between you and the other members. Smart contracts are contracts now, specifically contracts between the members of DUNA unincorporated associations.

It’s probably not the worst idea in the world for a DUNA to have a plain-language governing instrument anyway. But the point is, a DUNA doesn’t have to have one, so folks who are comfortable with existing DAO governance models can use the DUNA form. Whether this is advisable is another question.

103 – Governing law.

103(a) – Wyoming if formed in Wyoming.

103(b) is where things start get interesting. This is the first use in the operative of the term “governing principles.” Section 103(b) says “A DUNA’s governing principles” – that language again – “shall identify the jurisdiction in which the DUNA is formed.”

Normally what you’d expect to see for a contractually formed entity, like a partnership, would be a rule referencing some contract. See e.g. Section 15-106 of the Delaware Partnership Code which states that “the law of the jurisdiction governing a partnership agreement governs relations among the partners.” here though we have the “principles” language which refers back to smart contracts. Moreover, this language – which says that the DUNA will ID the jurisdiction in which it is formed – seems to allow the possibility that a DUNA can be formed in another state. At the moment, that means Wyoming and Wyoming only. But what about in a year or two?

104. Profits, prohibited payments.

Provisions relating to distributions of profits among members.

105. Real property.

Permits the DUNA to hold property in its own name.

106. Statement of authority as to real property.

Requires the DUNA to record a statement of authority in order to effectuate any transfers of real property (land).

107. Liability in tort or contract.

This is where things start to get really interesting.

Normally, unincorporated associations are just that – unincorporated. They don’t file with the government. They spring into existence and wink out of existence automatically as their members will them to do. (Noting that I am an English lawyer first and an American lawyer second, this is principally informed by my understanding of the concept under English law. One of my US-native colleagues, Gabe Shapiro, helpfully pointed out that some remote, faraway U.S. provinces like California have an unincorporated association statute which also does this and that US partnership/unincorporated organization law “embodies a ‘quasi-entity’ principle” post-RUPA, whereas English unincorporated associations benefit from none of the protections associated with English non-corporate, limited liability partnership forms like an LLP.)

As such, unincorporated associations – at least of the English type I’m used to – historically didn’t often handle high-value transactions or engage in serious business. For example, a local bowling club (bowling being outdoor bowls on a nice green lawn, not Big Lebowski-style bowling) or other sports club is the type of community organization which would usually adopt the form.

The “form” of course is that there is no form. For English law purposes, a UI has no legal existence separate from its members – it is its members – and individual members are personally responsible for its debts. It cannot be put into administration (bankruptcy) and offers no liability shield to its membership from the torts carried out by the organization. This is possibly why the form is more common in England than it is in the United States, where you’re more likely to simply encounter an LLC: if someone slips and falls at your bowling club, the damages award in the UK is going to be much smaller than it is in America, so in America, you want something that confers complete limited liability standing between you and that liability.

Wyoming followed California’s example and says a DUNA is “separate from its members for the purposes of determining and enforcing rights, duties, and liabilities in contract and tort” among various other protections. In this way, the DUNA is not really an “unincorporated association” but a quasi-corporation, possessing some of the key features of a corporation but without formally conferring it with legal personhood.

Thinking back to the Ooki DAO case, going the DUNAA route may be suboptimal when compared to an LLC in certain material respects. Immediately one questions the usefulness of insulating members from the perspective of regulatory enforcement (which is neither contractual nor tortious in nature, but rather concerns the enforcement of public rights by the government in its sovereign capacity) and offers no shield to state or federal, or foreign, criminal law.

Section 108- Capacity to assert and defend.

DUNAs can sue and be sued in their own name.

Section 109 – Effect of judgment or order.

Judgments vs the DUNA are not judgments against the members.

Section 110 – Appointment of agent for service of process.

Required in every state for every entity or quasi-entity registered in that state. DUNAs can be validly served with legal process at this address.

Section 111 – Summons and complaint.

To be served on the agent for service of process.

Section 112 – Claim not abated by change of members.

Change of membership in a DUNA doesn’t absolve it of liability in respect of a claim for relief vs the DUNA. Kicking out an admin who did a bad thing doesn’t mean a lawsuit against the DUNA for an action undertaken on the DUNA’s behalf by that admin goes away.

Section 113- Venue.

DUNAs are resident, for venue purposes in litigation, in the county in which it has an office or where the agent for service of process resides.

114 – Perpetual existence.

DUNAs, like corporations and (generally speaking) unlike trusts, can continue in existence in perpetuity. This can be changed by “governing principles.” Dissolution occurs per Section 120 majority vote or unless otherwise specified by the “governing principles.” Falling below 100 members will cause the DUNA to convert automatically from a DUNA into a Wyoming Unincorporated Nonprofit Association (UNA, not DUNA) which is not “decentralized” and is thus governed by the Wyoming Uniform Unincorporated Nonprofit Association Act.

Section 115 – Admission, suspension, dismissal, or expulsion of members.

Normally, such as in the case of an LLC or a partnership, these procedures are handled by contracts – in the case of an LLC, the LLC/operating agreement, and in the case of a partnership, the partnership deed or partnership agreement.

This is the first really turbo-based part of the DUNAA. Once again we have reference to “governing principles,” which can mean an implied understanding which can be more than a hunch but something less than a contract, or an explicit contract signed in blood, or just some random Solidity code with no plan language terms, or anything in-between.

The “governing principles” language Section 115 states that persons will become members “in accordance with the governing principles” of the DUNA and if such principles do not exist, the “purchase or assumption of ownership of a membership interest or other property or instrument” that confers voting rights – read: tokens – will grant such rights until the person is expelled or the DUNA is wound up. There’s a lot of room for interpretation/misinterpretation here to the extent that governing principles are implied by conduct so DUNAs would do well to write them down, in advance.

It also provides for suspension, dismissal, expulsion from the DUNA “[s]ubject to the governing principles,” and resignation under the same concept in Section 116.

It’s probably better to just drop an IPFS hash pointing to a plain language agreement somewhere in your DApp to avoid uncertainty. I’m sure many DUNAs will not do this and problems will arise as a result.

117 – Fiduciary duties.

Members do not have fiduciary duties to other members. This differs from the Wyoming LLC Act, which does impose such duties, including the duty of loyalty, a duty to account for profits, and a duty to refrain from competing with the company – see Wyoming Limited Liability Company Act, Section 17-29-409, although these duties may be waived by a written operating agreement or after the fact on a per-transaction basis (see sub-section (f)). If members had such duties, it would require (unless waived) the members to not buy tokens in DAOs which were competitive with those of the DUNA or to make profits elsewhere in the crypto ecosystem based on knowledge they obtained in the course of managing the DUNA. This provision is thus at variance with previous law in Wyoming (and law which would have applied to a Wyoming DAO LLC), likely appropriately.

118 – No agency powers.

Members cannot bind the DUNA by reason of their membership. There’s a lot of analysis waiting to be written here on agency theory and how a DUNA and its members hold themselves out as its representatives. In the immediate term it is likely best for a DUNA to have a list of public key addresses for keyholders who are authorized to act on its behalf and a clear statement of how many of those keys need to sign a transaction for it to be valid and binding on the DUNA as a whole.

119 – Member interests transferable.

Membership interests are freely transferable unless otherwise restricted by code or by contract.

120 – Approval by members.

Default rule is that a voting majority of the membership is required to make certain “breaking changes” to the DUNA including forcible expulsion of members and admins, changing the governing principles, and disposing of the DUNA’s assets. DUNAs will likely want to reduce the thresholds here and/or operate on the basis of proposal and ratification rather than seeking pre-approval to dispose of any assets – otherwise, entering into a simple contract with a BORG would require a majority DUNA member vote. I hasten to add the BORG and DUNA concepts are complementary, not competitive – BORGs describe the relationship between a DAO and third party service providers, and a DUNA makes it easier for those third party service providers to get legal certainty over those arrangements. Win-win.

Perhaps an automatic process whereby contracts the DUNA proposes to enter into have a time-lock on them, so the contract will self-execute unless a majority vote cancels it, will become the norm so that DUNAs can go about their business without needing to seek prior member approval every single time.

121- Utilization of DLT.

“A DUNA may provide for its governance, in whole or in part, through distributed ledger technology, including smart contracts.”

My former colleague at my 2014-era blockchain startup Casey Kuhlman coined the phrase, “smart contracts are not smart and they are not contracts.” Thanks to this provision, where DUNA membership is concerned, smart contracts are still not smart but they definitely are contracts.

Just huge. Again, I never thought I’d live to see this. It is hard to believe this is an actual law. Bravo to the A16Z guys for pulling this off.

122- Consensus formation algorithms and governance process.

Software-driven methods permissible for governing the association as long as they’re reasonable and comply with state law. The reasonableness requirement will likely be a source of litigation in the future.

123 – Selection of admins.

Basically the DAO version of appointment of managers.

124. Right to inspect records.

This has the potential to be a huge pain in the ass. tl;dr if you have a shareholder they have the right to inspect books and records of the business. Here, the right to inspect exists but not if the access isn’t contained on “a record available to the member or administrator on decentralized ledger technology.” The way I read this is that a DUNA will have to disclose the full range of its finances and on-chain holdings, even if not on the chain on which the DUNA itself lives, and transaction history to any member at any time, and will likely need to cache this information on a continuing basis so that it can be served up on demand.

125 – Indemnification and advancement of expenses.

tl;dr members can be indemnified for expenses etc. incurred in the course of the DUNA’s business and can request to be indemnified for attorneys’ fees if they’re sued.

126 – Winding-up and termination.

Winding up is a majority voting matter unless otherwise specified – see Section 120. An administrator can be authorized to do this but is subject to the duty of care when doing so. If no administrator is appointed all members owe a duty of care when winding it up. This is fairly weighty stuff, not to be taken lightly.

127 – Mergers. (!!!)

Section 127 states that you can merge DUNA DAOs into corporations, partnerships, or other DUNAs, and vice-versa. There’s nothing original about a corporations code having provisions permitting mergers between two entities.

Introducing the DUNA into the mix is novel because it allows tokens with very loose organizing rules, crypto-native DAOs, to vote their way into the DUNA form and then vote their way into a merger with something traditional. People have been talking about what it would look like to merge one token project with another token project for the better part of the decade. I remember thinking to myself, back in the day, “there’s no legal mechanism for token projects to formally merge. Tokens are property, not entities. We haven’t got the legal rules to do it. The tax consequences would be terrible.”

And, for a time, I was right. Christoph Jentzsch and Stephan Tual’s “The DAO” project in 2016 – that DAO – existed to fund ecosystem companies, take tokens in the projects in exchange for funding, and then pass on the token ownership to its own token-holders, much in the same manner that a venture fund or, depending on what their long-term strategic outlook was, potentially Berkshire Hathaway, does today. The idea, however, that a corporations code would permit a merger with a DAO (rather than merely an acquisition of DAO tokens) was a crypto fever dream, equal parts insane, beautiful, and impossible, the sort of thing you would only speak about in a dingy back room of a startup accelerator in Berlin while buzzed on the effusions of a lightsaber-sized nicotine vape pipe.

There was, of course, no legal mechanism in the DAO, nor a technical one, to do any of this correctly. For this reason, at the time, I wrote of the project that

#THEDAO might look and feel like a company, but on cursory examination, too many gaps, too few formalities, not enough structure and legally incorrect methods reveal themselves as fatal to the exercise…

…speculation in Ether would be all the return that DAO Members should reasonably expect to benefit from under such an arrangement. In the absence of clear and unambiguous legal documentation relating to and governing (a) the DAO’s membership and formation and (b) heavily negotiated terms and conditions for each funding proposal, it would seem to me that DAO Subcontractors are, under the current state of affairs, likely to retain 100% of their intellectual property and that the benefit of that work product would not accrue to the members of the DAO.

This has been true of most DAOs created since then. Assuming DUNAs are correctly structured and get good legal advice, it is now legally possible for one DUNA to programmatically merge with another DUNA token project, or a non-DUNA to merge with a DUNA, or a DUNA to merge with a non-DUNA, by approving a plan of merger, and for that plan and and its execution to comply not with a formal agreement but merely to be in accordance with each organization’s “governing principles” – again, keeping in mind that “governing principles” here can be hard-coded in smart contracts and not require a single piece of paper or even a word in plain English, since the DUNAA defines “governing principles” to include things like “consensus formation algorithms” and “smart contracts.”

Fully automated Token M&A.

Sweet.

128 – Conversion.

You can convert the DUNA into a corporation, partnership, or LLC. Also, sweet.