Author: Exosphere.L2
I am seeking the DAO’s approval to adopt this operating agreement, which will serve as the governing framework for the Layer2DAO non-profit limited liability company that we are in the process of forming under the laws of the Republic of the Marshall Islands (“RMI”), and proceed with the incorporation. This operating agreement and the DAO’s adoption of it are required steps to form the LLC under the laws of the RMI.
https://docs.google.com/document/d/1aJfrJ9dVu_YCFdVO6DDauV5nTRuge1kaV7ZVXljgG-w/edit
Throughout 2022, interested community members have evaluated Layer2DAO’s options to form a real-world entity to provide the off-chain means for executing the DAO’s work and vision, further the goals of decentralization and automation, and achieve a level of resilience. After researching and exploring a variety of different options, the recommendation is to form a member-managed non-profit limited liability company (sometimes called “NP LLC”) under the laws of the Republic of the Marshall Islands (sometimes called the “RMI”).
Our community’s principles of decentralization are rooted in transparency, consensus-building, independence, and censorship resistance.
To continue to realize these principles, true decentralization requires a diverse community of contributors that interact with the protocol and further its software and technological development, marketing and protocol growth, business development, finances and operations, intellectual property, and governance decisions.
To fulfill these principles, web3 communities require the means to interact with not just on-chain blockchain ledgers, smart contracts, and software code, but to also participate in off-chain activities with real-world people and organizations. When performing activities and taking on duties within Layer2DAO, contributors and token holders should enjoy the benefits of limited liability. These off-chain activities, as well as liability protection, require the creation and maintenance of a real-world entity.
MiDAO has been selected as the service provider to help form and serve as the registered agent for its RMI NP LLC for several reasons, many of which can be found in MiDAO’s incorporation guide here: https://docs.google.com/document/d/1ieZp6Y7nio9RB2fU4a1ir7g9uV6oTycFcv5a8kExT_o/edit
MIDAO helps DAOs form and maintain RMI NP LLCs at reasonable rates. MiDAO has been helpful through the process and answered our numerous questions. MiDAO is a licensed Registered Agent in the RMI and has worked closely with the RMI government to establish and maintain this worldwide unique NP DAO LLC entity type.
An operating agreement is a governing document that provides for how the member-managed non-profit LLC functions, sets out the rules for how the community will govern and operate it, the purposes of the LLC, its governance mechanisms, how it and its rules will be amended and modified in the future, and the LLC’s administrative functions and requirements.
The LLC will be managed by the Token Holders, meaning it will be an arm of the Layer2DAO but will have no direct governance over the Layer2DAO or its treasury assets without a Governance Resolution adopted by the Token Holders (“Token Holder” is a defined term in the operating agreement).
Motivation
Any LLC requires rules to operate. An operating agreement sets forth those rules. I am proposing that Layer2DAO adopt the above-linked operating agreement as a required next step to move forward with the formation of the Layer2DAO non-profit LLC under the laws of the RMI.
The draft operating agreement, in its definitions section, sets forth a number of defined terms that are applicable to how the Layer2DAO LLC will function as a non-profit managed by the Token Holders.
Article I involves the organization of the LLC and pertains largely to administrative matters, such as its name, registered agent and office, principal office, additional documents that may be required, and its perpetual term.
Article II sets forth the LLC’s non-profit purposes and powers.
Article III pertains to the Members, which are identified as the Token Holders (who must hold a “Token”), incorporates the governance resolutions already adopted by the DAO and which remain effective, including the governance framework and prior LTIPs that passed and are still effective (called “Governance Resolutions”)
Article IV pertains to a Member’s rights and duties and similarly incorporates the quorum threshold that was previously adopted along with the balance of the governance framework and other Governance Resolutions that remain in effect at present.
Article V pertains to the management of the LLC through its authorized representatives.
Article VI pertains to accounting and the maintenance of certain records through the Smart Contract, Snapshot (the Voting Mechanism), hard copy documents, and certain other records as specified.
Article VII provides that members do not need to make capital contributions, which is true. To become a member, one becomes a Token Holder, which will involve acquiring L2DAO from another address or holder.
Article VIII pertains to transfers of membership interests by Token Holders and the admission of additional members as explained above. Any address with L2DAO or xL2DAO will be considered a member because the address is a Token Holder. Once an address no longer has L2DAO or xL2DAO (because it was transferred, burned, etc.), the person, organization, or entity controlling the address will no longer be a member.
Article IX pertains to the dissolution of the LLC in the manner consistent with the RMI Non-Profit Act.
Article X pertains to how to amend the LLC operating agreement, which will be by a simple majority vote once a quorum has been established, unless a higher threshold vote applies and, in that case, the higher threshold will govern.
Article XI pertains to miscellaneous matters, including the LLC’s indemnification of authorized representatives and the resolution of disputes by arbitration or otherwise under the UK Jurisdiction Taskforce’s (“UKJT”) unique dispute resolution rules, published in April of 2021, for digital asset disputes and blockchain issues. The UKJT’s Rules are available here. The adoption of these rules for resolving disputes is particularly helpful because otherwise it would be almost impossible to ascertain how or where intra-member and other related disputes would be resolved.The UKJT Rules are also developed for and uniquely suited for blockchain disputes - purpose of the Rules is to “facilitate the rapid and cost-effective resolution of . . . disputes, particularly those involving novel digital technology such as cryptoassets, cryptocurrency, smart contracts, distributed ledger technology, and fintech applications.”
Risks
Centralization and Counterparty Risk
The DAO will operate a real-world entity that will have real-world consequences: it may sue and be sued, will be subject to legal process, and will incur, collect, and discharge obligations and liabilities. The RMI NP LLC will be subject to the laws, regulations, and oversight of the Marshall Islands. Although the Marshall Islands is a sovereign jurisdiction outside of the United States, it does depend upon the United States and certain services and funding it provides.
The RMI NP LLC’s registered agent options will also be limited to MiDAO by virtue of the design of the RMI’s DAO legislation and administrative functions. This means that if the RMI NP LLC encounters an issue in relation to the RMI or MiDAO, it will have to resolve those issues through off-chain processes and rely upon or implement other real-world entities elsewhere.
Costs and Liabilities
The DAO treasury will also be required to fund the costs and legitimate liabilities incurred by the RMI NP LLC.
Non-Profit LLC
While there are substantial benefits to operating a non-profit LLC, Section 122 of the RMI Non-Profit Entities Act does prohibit the LLC from paying dividends or making distributions of any part of its assets, income, or profits to its members. This same prohibition is also found in other DAO entity models, such as foundation companies and unincorporated non-profit associations. However, in true DAO fashion, the RMI legislation enables the DAO and the LLC to issue the equivalent of grants and bounties, to pay reasonable compensation or reimburse reasonable expenses to members for services rendered, and to confer benefits upon or make contributions to members and non-members in conformity with its purposes. Our position is that this includes transferring DAO assets to other smart contracts that might allow claiming part of those assets by token holders.
The LLC would be prohibited from conferring these benefits or making these contributions if the LLC becomes insolvent or is rendered unable to carry on its purposes and where the fair value of its assets remaining are insufficient to meet its liabilities.
Impacts
There is no anticipated negative impact for the team, contractors, treasury, tokenomics, or other committees recognised by the DAO. After incorporation, our contributors will enjoy the benefits of limited liability established by the laws of the Marshall Islands. It will be possible for any contributor providing services to the DAO to receive compensation from the DAO LLC, subject of course to DAO governance, RMI law, and the operating agreement.
By rolling out the formation of the non-profit LLC and the adoption of the operating agreement, the community is streamlining this process as much as reasonably possible. And the operating agreement was drafted in a manner through which it should enable the LLC to operate in the same manner that the DAO has historically operated and consistent with its Governance Resolutions that are in effect today.
Conclusion
This is the next logical and required step to incorporate Layer2DAO.
Specification
Submit the operating agreement to MIDAO for submission to the RMI Registrar and proceed with any remaining items required to form the Layer2DAO non-profit LLC under RMI law.
Execution Plan
Identical to the Specification.
OPTION 1:
The operating agreement will be adopted and we will proceed with the incorporation of the LLC in the RMI
OPTION 2:
Further Discussions required
