A primary legal aspect to consider is DAO's legal personality.
Usually, decentralized autonomous organizations don't have legal entities at all. Still, regulators in various countries are starting to move toward giving them a chance to be a legal person. For example, DAOs can now be recognized as a special type of LLC in Wyoming. At the moment of writing this article, we are not aware of such options in other countries.
DAO could benefit from having a legal entity to be able to sign contracts with counterparties. Even though in the crypto industry, many interactions work purely based on trust and smart contracts, more broad adoption of DAOs requires engaging in more formal legal relationships.
An organization set up like DAO still has to deal with lease contracts, open bank accounts, pay salaries, and so on, which is where the legal personality comes in handy. A drawback of having a legal entity is that it creates additional challenges and expenses on its administration, reporting, setup, etc. This is why early-stage DAOs may not benefit from launching it.
The second essential aspect is the regulation of the governance token.
There are two things to consider:
- In some countries, all cryptocurrency issuers, including DAO, must register. For instance, in the US, all the issuers controlling the emission and burn of crypto assets are considered money service businesses. Accordingly, they have to register under the Bank Secrecy Act in each State separately, except for the few that don't require such registration. For this reason, many ICOs and exchanges don't work with US residents at all.
- The securities legislation. Sometimes, the governance tokens can be recognized as securities, often providing voting rights and profit distribution to their holders. The crucial metric distinguishing a DAO token and a security token is whether the token in question offers a right to obtain profit and the way it is distributed. There's also a factor of whether the token is promoted as an investment with an expectation of generating returns.
Different countries have different regulations and criteria for determining whether the token is security: for example, the Howey test in the US is stricter compared to other jurisdictions. Being classified as a financial instrument doesn't render the governance token obsolete but creates a limitation on its promotion and registration or notification requirements, the violation of which may result in harsh consequences. To stay secured, it's better to get advice from lawyers or consultants specializing in the field.