How a Marshall Islands LLC can protect your members

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We’re publishing this a day after U.S. Commodity Futures Trading Commission took the position that it could pursue action against voting members of a DAO. That puts a heavy burden on members of DAOs that don’t have a legal entity.

That’s why it’s important that we publish this interview with Adam Miller of MIDAO, the company that helps DAOs incorporate in The Marshall Island.

In this interview, Adam explained…

…the importance of having a legal entity for a DAO.

…the benefits of incorporating in the Marshall Islands.

…and the #1 issue that led DAOs to fail.

Here are my notes on the interview:

Andrew: Tell me about one of the DAOs that MIDAO incorporated in the Marshall Islands. (Time stamp: 1:11)

Adam: Satoshi Island purchased a large island in the nation of Vanuatu, in the South Pacific. It’s turning it into a crypto civilization.

They’re erecting amazing buildings, have great internet access, and are attracting people who want to live the crypto life on a beautiful island.

Andrew: Why did they want to work with MIDAO? (1:39)

Adam: Most DAOs think about the risk of unlimited liability that comes with any collective business activity with other people.

For example, if someone joins a DAO and does some work, they could get sued for something related to that work. For example, they could lose someone’s money, or someone could slip and fall on their island and sue for medical bills.

Without some kind of liability shield, the individuals involved in a DAO can be held financially liable. A corporation or foundation or some kind of corporate veil offers a liability shield.

The other big thing that comes up is what we call “corporate personhood,” which is the ability of a DAO to act as a person in the eyes of the law to do things like own property.

You want to own real estate? You need a legal entity.

You want to own your logo or other intellectual property? You need a legal entity.

There are also tax optimization reasons.

Andrew: Talk about taxes. (2:56)

Adam: People involved in a DAO without a legal entity are held liable for taxes on its earnings. For example, imagine a DAO with 100 members earns $100 million. Those 100 members will owe the IRS taxes on $1 million of capital gains if they’re in the US and most jurisdictions.

With the right legal entity, members don’t have a tax obligation. The entity has a tax obligation. Members only have an obligation when money is distributed.

Andrew: Why the Marshall Islands, of all places? (3:56)

Adam: The Marshall Islands has a decades-long history of being a popular home for shipping companies to create their legal entities. 50 companies that are publicly listed on NYSE and NASDAQ and 20% of the world’s shipping capacity are registered in the Marshall Islands.

So we approached the Marshall Islands last year and said, “you’re a leader in shipping. How would you like to be a leader in a new space?”

One of the reasons the Marshall Islands is a leader in shipping is that it’s both a sovereign nation that can make its own laws and because of The Compact of Free Association it gets protection and support from the United States. It uses the US Post Office and other federal agencies, for example.

Andrew: And still the laws of Delaware have an influence. (5:12)

Adam: Delaware is the number one corporate home for companies around the world, especially in the United States. That’s because Delaware has the most relevant case law. So companies know that if there’s a dispute, there’s a good chance they’ll be a solution in case law, so they won’t have to go through an expensive legal process.

The Marshall Islands decided to write into its laws that it will follow Delaware precedent, unless there’s a conflicting precedent or law in the Marshall Islands. That allows for the benefit of a Delaware company, without being subjected to US regulations.

Andrew: I’m guessing one of the reasons Satoshi Island wanted to work with you is it wanted to maintain anonymity of its DAO’s members. The Marshall Islands won’t require them to disclose who they are, right? (6:01)

Adam: Very minimal. The Marshall Islands found a great way to minimize Know Your Customer (KYC) requirements.

A minimum of 1 DAO member and a maximum of 10 need to dox themselves and do a KYC. The hundreds of thousands (or whatever the remaining number of members is) can remain completely anonymous.

Andrew: And the way they do that is by checking the inflows into a DAO member’s wallet? (7:04)

Adam: We can use similar methods to those used by governments around the world to make sure wallets they're investigating are not connected to criminal or terrorist activity, which is to look at the flow of money across the history of the blockchain, and look at events that have been tagged as criminal.

Andrew: But if a crime was committed off chain and the money was put into a brand new wallet which is part of the DAO, there’s no way to flag it? (8:07)

Adam: The expectation is that the centralized exchange that brought the money on chain is also doing this work.

Andrew: What are the other benefits? (8:52)

Adam: The Marshall Islands is less expensive than most non-US options.

Also, we've written smart contracts and digital ledger addresses and blockchain into the actual law. So you know, for example, that it's acceptable to have a smart contract that governs your DAO, or let's say an ERC-20, or an NFT token that represents membership in your DAO.

Andrew: MIDAO helped get the law on the books? (9:39)

Adam: Our team helped draft the legislation that we then partnered with members of the Marshall Islands, Nitijela (The Legislature) on finalizing and proposing the law.

And we're working with them on ongoing updates to the legislation to eventually create a whole regulatory framework for digital assets that will try to make the Marshall Islands the best home in the world for potentially any digital asset project.

Andrew: Before MIDAO you founded DAOPlatform.io, a consulting company that helped set up DAOs. In your experience there, what’s the #1 issue that led DAOs to fail? (15:07)

Adam: Onboarding.

They get people who are excited about DAOs, especially now with all the general excitement about them. These members join Discord, or another chat tool, eager to help. Unless there’s something for those eager members to do, the DAO is going to lose them.

Even if there’s something for a new member to do, it’s not enough. DAOs can’t say something like, “go work on this Website,” and ignore the member for weeks afterward. They’ll churn.

Andrew: What have you seen that DAOs do well for onboarding? (16:13)

Adam: Documentation.

It can be on Notion, or a wiki, or Web, or chat, or somewhere else. The important thing is members know what to do next.

Andrew: You have a podcast, too. Can we help promote it? (21:26)

Adam: It’s called, “Just DAO it.” It’s news and interviews for people who want to start DAOs.

Andrew: Your Website is MIDAO.org. And ours is joinOrigami.com, but for anyone who’s starting a DAO and wants to think it through, our team can help, even if they don’t work with Origami. Email us at Contact@joinOrigami.com