Original Author: Xiao Sa Legal Team
Original Author: Xiao Sa Legal Team
As we mentioned in previous articles, DAO is a special organizational form, which uses smart contracts as the highest charter to control the operation of the entire DAO. There is no centralized management structure in the organization, everything is transparent and democratic. So, can DAO operate legally in China? Today, Sister Sa's legal team will take this as a perspective to chat with you.
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Comparison between Overseas DAO and Existing System
The first DAO appeared in 2016. The full name is "The DAO". At the beginning, it was just an ico investment tool, aiming to raise funds in a rational way and establish a decentralized venture fund. The DAO issued its own DAO token in exchange for ETH as its own funds. Token represents the holder's economic interests and voting rights in The DAO. However, in 2017, due to a serious smart contract vulnerability, the ETH in the DAO contract was stolen by attackers, and The DAO, which lost funds, could no longer maintain operations, and its concept also fell silent.
Today we will start from the existing system, and explore the possibility of compliance within the Chinese legal framework by comparing the differences between the traditional company system and the DAO.
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(1) Comparison between companies and DAOs
The corporate system is one of the greatest creations of modern commerce. According to the "Company Law", the main forms of modern corporate enterprises in my country are limited liability companies and joint stock companies. The characteristic of the company system is that the company has a wide range of capital sources, which makes large-scale production possible; the investor has only limited liability for the company, and the investment risk is relatively low; the company has an independent legal person property right, which ensures the independence, continuity and Integrity; separation of ownership and management.
According to the definition of company in Article 3 of my country's "Company Law", a company is an enterprise legal person, has independent legal person property, and enjoys legal person property rights. The company is liable for the company's debts with all of its property. The shareholders of a limited liability company shall be liable for the company to the extent of their subscribed capital contributions; the shareholders of a joint stock limited company shall be liable to the company to the extent of the shares they subscribed for.
According to the U.S. DAO Act, DAO is a limited liability company (LLC). Today we use LLC to compare with the existing company system. The biggest feature of LLC and DAO is that the members of the enterprise have limited personal liability and member management obligations, that is to say, these members only bear the responsibility for their own negligence, and will not bear the negligence liability of the enterprise or other members. Members of an LLC are both shareholders in the company, members and employees of the LLC, and each member has the same voting rights. But sometimes a member representative (managing member) with a little management experience is selected from the members for management.
It can be said that DAO is a business structure with both limited liability and partnership, which is more flexible than the traditional company system. In addition to the difference between smart contracts and company articles of association, and the difference between centralized management and decentralized management, DAO members have more say in the organization than traditional company members. Proportional size and lose their own voice.
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(2) Comparison between partnership and DAO
The author personally believes that the partnership system is the most similar business structure to DAO in my country at present. Regarding the definition of a partnership enterprise and the liability system of partnership members, according to the provisions of Article 2 of the "Partnership Enterprise Law", the term "partnership enterprise" in this law refers to a general partnership enterprise established within the territory of China by natural persons, legal persons and other organizations in accordance with this law. A limited partnership enterprise; a general partnership enterprise is composed of general partners, and the partners bear unlimited joint and several liabilities for the debts of the partnership enterprise. If there are special provisions in this Law on the form of liability of general partners, those provisions shall prevail; a limited partnership enterprise is composed of general partners and limited partners, and the general partners shall bear unlimited joint and several liabilities for the debts of the partnership enterprise. The amount of capital contribution paid is limited to the liability for the debts of the partnership enterprise.
The characteristics of LLC and DAO have been mentioned before, so I won’t go into details here. Comparing DAO and partnership system, we can find many common points between them. One is “member governance”. Article: Partners have the same rights to execute partnership affairs. According to the stipulations in the partnership agreement or upon the decision of all partners, one or several partners may be entrusted to represent the partnership enterprise externally and perform partnership affairs.
Here, DAO also follows this rule. Each member is a shareholder of DAO and can be said to be an employee of DAO at the same time. Before the operation and management rights are outsourced, each partner can equally execute partnership affairs, from From this point of view, it is the embodiment of the idea of "decentralization". The second is tax supervision. According to Article 6 of the "Partnership Enterprise Law", the partners shall pay income tax separately for the income from production and operation and other income of the partnership enterprise in accordance with the relevant tax regulations of the state. DAO also pays income tax by its members, not by the organization.
Through the comparison of partnership, company system and DAO (LLC), we can conclude that DAO is actually a limited partner with decision-making power. If you are a small and medium-sized investor, on the one hand, you are unwilling to bear unlimited joint liability for debts like a partnership, but want to enjoy limited liability protection like a company; Expect yourself to be able to participate in the operation of the business like a partner; DAO (LLC) seems to be the best choice. It is a pity that there is no LLC system in our country.
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Can DAO organizations operate legally in my country?
From the perspective of the existing legal system, this is very difficult. The key is that my country has not stipulated such a special business structure. Wanting to be protected by the limited liability system while all members have the same management rights as a partnership enterprise is currently a "fish and bear's paw" problem. The reason why the general partner bears unlimited joint and several liability for the partnership is because according to the law, the partnership does not have the qualification of a legal person, that is to say, it is not a "person" in the legal sense.
Legal personality is the core of the limited liability system. Many people have a misunderstanding: a limited liability company undertakes limited liability. In fact, this is not always the case. As a legal person with independent assets, a limited company bears unlimited joint and several liabilities for its debts. If the company does not have legal personality, it does not have the capacity for rights, does not have its own property, and cannot independently bear civil liability.
Therefore, the debts of the partnership enterprise are actually borne by the partners, and the partners have unlimited liability, that is, the partners shall bear the debts of the partnership enterprise with all their properties.
Therefore, the limited liability system that is crucial for DAOs does not exist in our country. According to my country's "Company Law" and "Regulations on the Administration of Company Registration of the People's Republic of China", the acquisition of company legal personality in my country adopts the registration system, that is to say, the key to whether it has legal person qualifications is whether to wait for the registration of the competent department of industry and commerce. It is obviously impossible to do DAO outside the legal system. Therefore, DAO has a great possibility to be regarded as a partnership enterprise in our country.
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The Criminal Law Risk of DAO Operating in my country
The normal operation of any organization is inseparable from the precondition of raising funds (capital), and DAO is no exception. Since the core smart contract of DAO is a product of blockchain technology, it is inherently related to virtual currency, NFT and other things. And in practice, the vast majority of DAOs either raise start-up capital by issuing their own ICO tokens, or raise capital through the sale of NFT and other items. Moreover, most of the funds raised by DAO organizations are in various virtual currencies, especially Ethereum.
Therefore, if DAO wants to adopt an overseas business model, there will be huge criminal law risks in operating in my country. Needless to say, ICO issued coins. On September 4, 2017, seven ministries and commissions issued a document pointing out that ICO is essentially an unapproved illegal public financing behavior, suspected of illegal sale of token tickets, illegal issuance of securities, and illegal fundraising. Financial fraud, pyramid schemes and other illegal and criminal activities, ICO has no room for negotiation in our country.
If the funds are raised through the sale of NFTs similar to CityDAO, since the country has not yet issued any legal documents to regulate NFTs, and there are already many large manufacturers selling NFT products publicly, the regulatory authorities may have certain concerns about them at this stage. tolerance.
However, we absolutely do not recommend raising DAO start-up funds and obtaining membership rights by issuing NFTs. Although this method seems feasible, it is very likely to be regarded as a "representative" expressly prohibited in the 924 notice under the penetrating supervision of the regulatory authorities. "Currency issuance and financing" behavior and disguised ICO behavior, thus constituting the crime of fund-raising fraud and the crime of fraudulently issuing stocks. At the same time, this will also alienate the nature of NFT and become a financial product, which we have always tried to avoid.
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write at the end
write at the end
While the overseas DAO model is difficult to legally land in our country, we must keep our eyes open and beware of "intentional people" who use the banner of DAO to commit fraud and illegally absorb public deposits and other illegal and criminal activities.
Recently, Sister Sa's legal team has discovered many such phenomena in practice, so we would like to take this opportunity to remind all partners that we must be cautious about new technologies and invest rationally and legally.
