Thank you Ed for this proposal and your commitment to Terra/Luna Classic DAO
As a lawyer myself I will try to give constructive feedback on the proposal.
Also, and before starting I would like to apologize in advance for the length of this post. However, it is in our opinion critical to have a very good understanding of the situation and of the different risks before forging an opinion on the proposal.
0. INTRODUCTION
The proposal we are discussing here covers two different points THAT SHOULD BE STRICTLY SEPARATED.
On the first hand there is the retainer for legal and regulatory counsel and on the second hand the incorporation of the Terra/Luna Classic DAO as a legal entity.
The way the proposal has been written is ambiguous and almost makes the first part of the proposal (legal & regulatory counsel) conditioned to the second part (giving legal or juridical personality to the DAO). Indeed, the answer to the first question of the FAQ states that âThe goal of this proposal is to have the law firm represent the Luna Classic DAO. Specifically, this means that there would need to be a foundation created that is associated with the protocolâ.
This point is in my opinion non acceptable specifically because the engagement of the law firm would precede the creation of the legal entity, but would somehow make the former conditioned to the latter. In other words, accepting âthe legal representationâ part of the proposal would de facto be interpreted as approving the second part of the proposal, namely the incorporation of the Terra/Luna Classic DAO.
Here, without consideration to the proposed fee, the second point has much more consequences than the first point. Indeed, such change of structure should not be taken lightly as its implication could potentially result in the downfall of Terra/Luna Classic and its whole ecosystem. We will dive into that matter further below.
On a slightly different note I would like to stress the fact that the wording used in the proposal is legally ambiguous and might not cover what a normal person would expect from a law firm. For instance, the word ârepresentationâ has a very specific meaning that does not transpire from the proposal. Indeed, representation, the most important part of representation is the one held before courts. Nevertheless, I doubt that the $20.000 retainer covers any legal proceeding in the hypothesis of a court case. It is most probable that the law firm will ask for an extra fee to legally represent the DAO or any of its contributors before court. The retainer, as detailed in the proposal only covers:
1. Advise the community on steps toward setting up a Cayman Islands foundation company to associate with the Luna Classic DAO. ( Cayman Foundation Companies are ownerless structures which combine the flexibility of a corporation or LLC with the fiduciary/ownerless benefits of a traditional non-profit foundation.)
2. Produce advice to mitigate U.S. regulatory risk
3. Field questions from the Luna Classic community.
4. Committee will be formed to interface with the law firm
5. Curated lists of questions from the community will be solicited and presented to the attorneys
6. Provide guidelines for contractors working from community pool spends
In addition, it is stated in the proposal that the law firm can give opinions (not qualified legal advice). This point is important to weight as the law firm waives any sort of responsibility with such a clause. In layman terms, it means that the Terra/Luna Classic DAO would not be legally protected by following the counsel provided by the law firm which challenges the whole purpose of this proposal, i.e. âthe need to limit potential legal risks and structure ourselves with a view toward long-term sustainabilityâ.
In any case, and before going further in the analysis of the proposal I would strongly advise to:
publicly share the quotation and the attached terms & conditions under which the law firm would engage business with the DAO before presenting the proposal to governance for the community to better understand where we are going. A refusal by the law firm to share such a document because of confidentiality or any other reasons would be a red flag as they are supposed to know how a DAO works.
THEREFORE I STRONGLY ADVISE NOT TO GO TO VOTE BEFORE:
a. Sharing the quotation as well as the terms & conditions proposed by the law firm; and
b. Creating two separated proposals (the first one being related to the legal structure of the DAO).
I will now review each part of the proposal and try my best to give constructive feedback.
As mentioned above the legal structure part is in my opinion the most critical one. This is the reason why I will start to analyze the need of a legal structure in the legal and regulatory context surrounding cryptos and DAOs (1) before taking some time to analyze the legal advisory part of the proposal (2).
1. PROVIDING THE DAO WITH LEGAL OR JURIDICAL PERSONALITY
If there is one certain fact regarding the legal and regulatory environment for cryptos and DAOs it is that there is absolutely no certainty.
Indeed, we can see that the US went on a crusade against cryptos and their own administrations are fighting each other on the definition of crypto (Cf. SEC vs. CFTC), the EU is trying to have a clear legal regime but limiting financial freedom and China almost becoming crypto friendly among others in a time and an environment where global financial powers are reshuffling.
This section will define legal personality and its implications (1.1) and explore legal risks in the current situation versus the situation where Terra/Luna Classic DAO would be legally incorporated (1.2), propose alternative solution to achieve the level of protection required by the contributors (1.3), and advocate an internet native situation more in line with what people are looking for in DAOs (1.4).
1.1 What is legal personality
Legal personality or juridical personality refers to the ability of an entity to have legal rights and obligations, such as the ability to sue and be sued, own property, enter into contracts, and engage in legal actions.
It is typically granted by central governments or states through legislation or regulation, such as the Registrar of Companies in the Cayman Islands. However, seeking legal personality in this traditional way may undermine the decentralization of a DAO.
Incorporation in a centralized state can erode the fundamental principles of a DAO, and therefore, in the most absolute terms the use of the term âDAOâ may no longer be applicable.
1.2 Letâs talk about legal risks
As mentioned in the proposal and above in my post, running a DAO contains several legal and regulatory risks that may be seen as constraints in regard to the development and sustainability of a DAO.
The risks that we will see just below are born by the DAO itself, its members (validators and delegators) and by its contributors. Those risks are due to the legal and regulatory uncertainties surrounding crypto and DAOs as they are technical and social innovations that donât really fit in traditional legal (TradLeg) framework.
In the âever-changing regulatory environmentâ as stressed in the first sentence of the proposal there are very few ways to mitigate legal and regulatory risks for the users and contributors of the DAO. Getting the legal personality is not part of the mitigating measures that we could think of. Indeed, incorporating the DAO (no matter the chosen jurisdiction) will not protect the users and contributors against change of law or new regulation.
In fact, the collection of risk will remain the same at best and increase at worse. As a matter of facts the following risks will add to the existent ones:
- Loss of Decentralization: Incorporating the DAO would likely result in the loss of decentralization, which is one of the key benefits of a DAO. By becoming a legal entity, the DAO would be subject to the laws and regulations of the jurisdiction in which it is incorporated, potentially undermining its ability to operate in a decentralized manner.
- Compliance Requirements: Incorporating the DAO would subject it to a range of compliance requirements, including filing annual reports, maintaining proper records, and complying with tax laws, KYC/AML obligations and so on. Failure to comply with these requirements could result in fines, other penalties. And even the dissolution of the legal entity.
- Liability: Incorporating a DAO could also result in increased liability for its members. If the DAO is sued or held liable for any reason, its members could potentially be held personally liable for damages. We want you to be aware that the members of the DAO are not only the outsourced managing team but also, the outsourced technical teams, the validators, and the delegators.
- Legal Uncertainty: There is still significant legal uncertainty surrounding the operation of DAOs. This means that incorporating a DAO could result in unforeseen legal and regulatory challenges that could be difficult to overcome. This could be a change of law & regulation in the country of incorporation or even transnational regulation (Cf. FAFT)
- Jurisdictional Issues: Incorporating a DAO in one jurisdiction could result in conflicts with the laws and regulations of other jurisdictions in which it operates. This could result in legal and regulatory challenges that could be difficult to resolve.
Also, it is important to note that the incorporation of the Terra/Luna Classic DAO contains non-legal risks for which other community members are more knowledgeable than me. Among them I will mention the following but feel free to develop:
- Governance Risks: Establishing a legal entity for the Terra/Luna Classic DAO may require changes to the existing governance structure, including the composition of the core team and community committee. There is a risk that these changes may not be well-received by the community or that the new governance structure may not function effectively. In addition the legal entity could easily overcome the DAOâs voted decisions because of many seemingly legitimate reasons
- Financial Risks: The costs associated with establishing and maintaining a legal entity can be substantial. Additionally, there may be unforeseen legal or regulatory expenses that arise in the future, which could place a strain on the Terra/Luna Classic DAOâs financial resources.
- Reputational Risks: If the legal entity is not established properly or does not function effectively, it could harm the reputation of the Terra/Luna DAO and its community members. This could lead to a loss of trust and potentially impact the value of the LUNC and USTC tokens.
1.3 Example of alternative solutions
I do understand the concern of contributors in regard to their technical, financial and managerial actions related to the Terra/Luna Classic DAO and this is definitely something to be dealt with. However, and as explained in section 1.2 above, incorporating the DAO will not mitigate those types of risks.
What is important to achieve here to protect our contributors is to make sure to square the business relationship in a way that it is clear that said contributors are acting on a mandate given by the community.
This can be achieved in several ways and there is already a lot of evidence that shows such subordination. Indeed, contributors are executing tasks approved by the community through the governance process.
Furthermore, extra processes can easily be implemented in the governance process to enforce such subordination links. We could for instance implement through governance, once and for all, one or several standard service agreements that would transparently set the terms and conditions for the contributor to provide services to the Terra/Luna Classic DAO. The only part of such agreement that would change for each task is the detailed description of the service.
Having such documentation would protect our contributors and waive their liability on the execution of governance decisions as long as the reprehensible act is not due to negligence or gross misconduct.
By the way, there is an interesting case law before California courts that just got out and stated that the founders of a DAO where not responsible for the hack that happen as the plaintiff âfailed to provide the necessary elements to establish claims of negligence, breach of fiduciary duty, and joint and several liabilityâ.
1.4 Letâs be bold and disrupt TradLeg
In this short section I just want to remind us that we are already part of the future. DAOs are internet native organizations and are not attached to any territory nor jurisdiction. Letâs be bold and keep it that way. Letâs try to disrupt the legal establishment which is based on territorial sovereignty of the state.
It is our duty to change the world we live in and fight for the ideal Satoshi presented to us 14 years ago. Letâs not play by the rules imposed by the legacy legal system and letâs impose our views on what tomorrowâs social organization should look like.
Letâs stay as decentralized as possible. We already know that the decentralization of the Terra/Luna Classic DAO is not fully granted and we should not make moves that would harm even further our ideal of decentralization.
Terra/Luna Classic is the opportunity of a lifetime and goes further than the sole financial gain. Furthermore, we have plenty of talented individuals contributing to this opportunity despite the ones leaving. Letâs aim big and letâs contribute to tomorrowâs legal order based on internet native organizations.
THEREFORE, I STRONGLY RECOMMEND TO VOTE NO TO THE INCORPORATION OF THE TERRA/LUNA CLASSIC DAO.
Now that we have explored the consequences of legal incorporation of the Terra/Luna Classic DAO, let analyze the retainer for legal counsel as well as the quotation attached to it.
2. RETAINER COST FOR LEGAL COUNSEL AND INCORPORATION
This section will be shorter than the previous one. Fundamentally, I have nothing against retaining a law firm for the Terra/Luna Classic DAO legal affairs nor I have any sort of prejudice against Horizon Law.
I will go through this section by first explaining that the process to select the law firm seems opaque and could have been conducted differently (2.1), I will then spot a few inconsistencies that should be clarified before proceeding to the vote (2.2) and give my personal experience in relation to the cost of incorporating an offshore company (2.3).
2.1 Request for Proposal, what is it?
According to the proposal Ed and al. (we) âhave had initial consultations with six US-based law firms, and follow up consultations with three of them to assess their knowledge, engagement, advice, and overall fit for the Luna Classic community revitalization effortâ.
First of all, we the community donât know who Ed refers to when he says âweâ. I am not sure that there has been any vote to mandate âweâ to consult with law firms. It actually almost comes out of the blue. Maybe we should act more like a DAO and consult the community before looking for law firms that will drastically impact the Terra/Luna Classic DAO. I might be wrong though as this goes further than my legal skills.
Furthermore, the community has no idea on the criteria that were used to shortlist from 6 to 3 and then select the winner. It would be very helpful if we, the community, could understand how the selection process was made.
It is written that âweâ have assessed the different law firmsâ knowledge, engagement and advice. I would be reassured to know that some of âweâ have proper legal skills for such assessement.
However, and once again I have no prejudice against Horizon Law but the process that led to proposing this very specific law firm should be shared with the community as a matter of basic transparency.
2.2 On the retainer itself and the wording used in the proposal
In a legal perspective I stand against some points in the quote provided by Horizon Law.
I first want to come back to the point I have mentioned in the introduction where entering in a retainer with the designated law firm would de facto oblige us to incorporate the DAO. As I am not in the confidence of the deal negotiated with the law firm nor in the confidence of preparing this proposal I donât know how those two were actually articulated together.
Indeed, despite the section stating that the incorporation would go through governance, the proposal clearly states that: âThe goal of this proposal is to have the law firm represent the Luna Classic DAO. Specifically, this means that there would need to be a foundation created that is associated with the protocolâ.
I donât know if this Is the result of a legal trick from the law firm to secure future business or if it was intended in the redaction of the proposal. Which doesnât really matter at that stage as the wording itself is too ambiguous to be approved as it is.
In my opinion, a law firm working in the crypto space specifically with DAOs should propose ways to enter into an agreement with a DAO without the need to incorporate the DAO.
By the way it is not specified in the proposal who or what entity will engage with the law firm before the foundation is created. As a community, we canât accept this lack of transparency either on purpose or by negligence.
The logic here is the following: If no one signs the agreement between the law firm and the DAO I donât see why it is then required to incorporate the DAO in order to have âlegal representationâ while the retainer seems more about providing non-binding legal opinions.
In this case we could once again imagine a transparent service agreement detailing the retainer and the mandate from the Terra/Luna Classic DAO to the law firm for legal advisory services.
On the other hand if someone or an entity signs the said retainer agreement on behalf of the Terra/Luna Classic DAO, the mandate to do so should be clearly stated in the proposal and review by the community. In addition to this such agreement should be shared with and approved by the Community. This is by the way the only way to effectively protect the signatory of the retainer agreement in case of breach of the said agreement or breach of the mandate given by governance.
Also, I want to remind us all that before signing any sort of retainer a law firm is acting for its sole interest.
In addition and as previously mentioned, the mandate of the firm per the retainer agreement is not clear. As a community we should ask for the mandate given to the law firm and understand what will be really covered and for whom.
I appreciate the FAQ effort in the proposal but we are dealing with a law firm and a minimum would be to have access to the terms and conditions binding the parties under this retainer.
2.2 Cost of incorporation
I happened to have opened a crypto company in the British Virgin Islands earlier this year.
At first I asked different law firms to quote such a service. Spoiler, they gave me pretty much the same quote as the one proposed here ($100.000).
However, such a budget was out of budget for the company I was contributing to. This is why I looked by myself and managed to incorporate the company using a service provider for less than $3.000.
The cost includes for one year:
- several registration fees and taxes;
- registered office & registered agent;
- a company secretary;
- fee of the service provider.
Incorporating an offshore entity is no rocket science and only requires some administrative work and the administrative fees required by the local government. The $100.000 is exorbitant and I am certain that such monies could be used for better ROI.
It would also be much appreciated to understand the $100.000 quote even in a very approximative way before going further.
VOTE NO TO THE INCORPORATION OF THE TERRA/LUNA CLASSIC DAO
VOTE NO TO THE RETAINER AS IT IS CURRENTLY PROPOSED
I am confident that we as a community can come with desired legal and regulatory security and stability without falling into the TradLeg trap and for a much lesser price.
I am more than happy to discuss the matter further with the proponents if you wish so.
Thank you for taking the time to read this long post.
