Last month, Tennessee became the second state to allow decentralized autonomous organizations (DAOs) to register as LLCs, following pioneer Wyoming. HB2645 and SB2854 provide that the Tennessee Revised Limited Liability Company Act applies to decentralized organizations. The legislation became law on April 20, 2022.
Chris Sloan, an attorney with Baker Donelson, has highlighted what this means for aspiring decentralized entities. In a blog post he explains:
“Prior to passage of the DAO Act in Wyoming and now Tennessee, 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.”
DAO’s are self-administering entities managed via smart contracts that can allow a broad group of participants to pool resources to pursue a shared goal with little “manual administration.”
Sloan states that a benefit of DAOs is they can issue tokens that do not meet the current definition of a “security” and avoid “potentially burdensome securities law compliance.” He believes that DAOs will become a fast growing type of organization and now Tennessee, along with Wyoming, are in a position to benefit from this new type of business entity.
