Status of API3 DAO Stakers, Grantees, and Multisigs
This is a memorandum provided strictly subject to and in accordance with my autonomous attorney disclosure accessible here, (i.e. this memorandum is not provided in my capacity as external general counsel of the API3 Foundation, but solely for the purposes and subject to the constraints and disclaimers in the foregoing disclosure), and should not be considered or relied upon as legal advice or professional advice of any kind. I may edit or separately publish this text at a later date.
In relation to some discussions surrounding the denial of the motion to dismiss in the Sarcuni v. bZx DAO putative class action, whether the court found the DAO is plausibly alleged to be a general partnership (where the facts are substantially, meaningfully differentiated from those of the API3 DAO), I figured it might be helpful write some thoughts in an effort to further reduce information asymmetry and attempt to preempt some questions that might still remain after reading this prior article of mine.
Beneficiaries and Grantees
As a brief refresher, the API3 DAO’s on-chain governance contracts permissionlessly affect (i) token transfers from the treasury contracts or (ii) other governance contract parameter changes without reliance upon any legal person acting as intermediary.
Stakers of API3 tokens in the identified governance contract are statutory beneficiaries of the API3 Foundation (under the Cayman Islands Foundation Companies Law 2017, as identified in the API3 Foundation Bylaws, who receive certain benefits from the API3 Foundation but do not have any legal claim to its assets or corporate body), and recipients of token transfers pursuant to a successful DAO Proposal’s function execution are either contractors (if such a legal agreement with the API3 Foundation exists) or simply third party grantees implied as contractors. The status of “beneficiary” of the entity and “contractor” or “grantee” are not mutually exclusive. The status of an identified beneficiary, contractor, or grantee provides a legal defense against liability for the API3 Foundation’s actions and of the DAO and protocol contracts, and related API3 services, and such actors may further address liability through legal agreements.[1]
However, in an abundance of caution should a regulator or court ignore such statutory and legal designations for whatever reason, it is best practice for individual DAO participants to use some type of legal entity wrapper for their activities. This helps to separate DAO- and grant-related risks and related legal actions from the individual’s personal assets, but the appropriate approach is often jurisdiction-dependent and each such individual should consult a lawyer in their applicable jurisdiction. American individuals sometimes use LLCs for this purpose, which are fast and relatively cheap to form.[2]
Proposal Proceeds and Multisigs
The terms of a DAO proposal are often essential for the legal classification of any transfer of tokens upon the execution of a passed proposal. Forum sentiment checks, debate over proposal details, and scrutinized voting is especially important where prospective recipients are unidentified and provide few details for usage of tokens in their proposal texts. Usage of transferred tokens for purposes objectively contrary to the proposal or a relevant legal agreement, or illegal usage, will likely be considered an invalid grant under the Bylaws and disavowed as an action of the API3 Foundation past the disbursement of the token. Therefore, liability for such impropriety would likely be unilaterally assumed by the rogue actor.
For multi-signature contract wallets requiring more than one individual signer to effect a transaction (“multisig(s)”) used as the initial recipient address pursuant to DAO resolutions, the tokens in such a multisig remain the property of the API3 Foundation until they have been disbursed to the ultimate destination(s) for the express purposes identified in the applicable resolution. Alternatively, any disbursements from a multisig not reasonably contemplated by the corresponding proposal are best clarified according to a legal agreement between the API3 Foundation and the applicable counterparty. No individual multisig keyholder/participating address has any legal right to, nor constructive receipt or dominion and control over, the tokens in the multisig (pro rata or otherwise) unless the DAO resolution (and any relevant related legal agreement) specifically provided accordingly, as the tokens are merely earmarked for disbursement by the relevant resolution and the Bylaws generally. An analogy might be made that such a multisig is another smart contract of the API3 Foundation used for grant budget apportionment purposes. To the extent participation in such a multisig evokes implied limited custodial obligations (in the interim between successful proposal function execution and disbursement of tokens from the multisig pursuant to such proposal), the custodial risk (that is, obligation to treat the assets in accordance with the proposal in the interest of the API3 Foundation, using commercially reasonable practices of security, etc.) is implicitly consented to by the Foundation and is limited to the amount of such proceeds, which are sometimes ultimately due to the signers themselves as contractors or grantees under the corresponding proposal. As always, it is the ultimate legal and factual recipients of tokens who are responsible for their own tax and other reporting obligations.
TL;DR: DAO participants should consider personal liability wrappers; grantees of tokens that would like legal clarity should enter into a legal agreement; multisigs used to disburse tokens after a successful proposal are effectively designated tools of the API3 Foundation and signers do not have individual legal rights or control over the held assets unless so provided in the relevant DAO proposal.
[1] Mere API3 token holders (i.e. non-stakers and thus non-beneficiaries) have potential defenses as well, including insufficiency of “special relationships” Crypto-CaseLaw/Dismissal.pdf at main · LeXpunK-Army/Crypto-CaseLaw · GitHub.
[2] A quick checklist of considerations for Americans forming a single-member LLC: https://twitter.com/erichdylus/status/1623346877612675075.