A. Summary

In this proposal to The DAO, we examine how DAO Token Holders (“DTH”) could achieve the same level of legal safeguards as real-world investors when they allocate Ether to both pure digital unincorporated projects and real-world incorporated ventures (we refer to “online” and “offline” proposals respectively).

We start with an outline of the legal analysis as it relates to The DAO token sale. We conclude that, irrespective of whether The DAO seeks to fund online or offline proposals, it will be legally stillborn if its token sale is not conducted within existing securities laws. In addition, we identify the authors of The DAO's smart contract as the actors most at risk from securities law enforcement. We therefore advocate interposing a DAO sponsoring platform under whose regulatory umbrella token sale can be legitimately conducted, and make some suggestions as to potential jurisdictions for such platform.

We then move on to a legal analysis of the position of the DTH themselves. Here, we introduced the concept of the “Smart Synthetic Equity" contract (“SSE”) — the concept code of wich we provide — which is meant to synthetically replicate the carry Venture Capital (“VC”)-type investors receive from their portfolio companies (“portcos”). This SSE has the double function of (1) acting as a trustless budget management tool to administer the Ether allocted per project, and (2) safeguard that DTH receive dividends and sales proceed when a project exits pro-rata their contributions to the project.

We aimed to engineer this both legally and technologically such that there is no requirement for the DTH to become shareholders or members in a legal entity (hence: “synthetic equity”). This in turn avoids the need for the DAO to become some form of body corporate in its own right. Key to our solution is the notion of a “trustless” trust structure, which we baptised the Decentralised Autonomous Trust ("DAT"): in the same way that the blockchain allows for trustless transactions, we introduce a smart contract-based governance protocol for the appointment, dismissal, and overall investment mandate of a real-world trustee who acts on behalf of the DTH as beneficiaries of a decentralised trust.

Finally, we outline the scope of the project Otonomos would wish to undertake on behalf of the DTH to legally fortity our solution and further develop its code repository, eating our own cake by making our budget for our project subject to the smart contract checks and balances of the SSE.

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