I’ve been reading a bit on the legality of Decentralized Autonomous Organization.
A great primer from Harvard Law circa 2022 walks through the general idea of them, how they compare to traditional coprorate structures. There are many traditional-style companies which match (or can be made to match) the way that DAOs work, like cooperatives or partnerships. Unfortunately, which ones these map to doesn’t seem well developed in case law. This means that it’s possible for members of the DAO (and, perhaps, their investors?) could be open to unlimited liability.
As discussed further below, unless a DAO is organized as a legally-recognized entity (which inherently defeats DAO-related principles to some extent), as a legal matter it may be considered, by default, to be a general partnership, with each member potentially having unlimited legal liability if something goes wrong.
From Investopedia:
Unlimited liability refers to the full legal responsibility that business owners and partners assume for all business debts. This liability isn’t capped and obligations can be paid through the seizure and sale of the owners’ personal assets without the protection that the popular limited liability business structure provides.
In 2023, there was an (in-progress) case which found that DAOs may be a general partnership. The specifics of this case are that there was a tool called “bZx Protocol” which claimed to be non-custodial, but a developer had a private key which granted ubiquitous access to all accounts. He was phished for $55 million dollars.
There is a fantastic resource from Paradigm investing comparing the different legal structures of DAOs and their legal/taxation notes. It’s not clear how up to date that is, though.