I. Executive Summary
Wyoming, a northwestern U.S. state with a population of approximately 580,000, the smallest among U.S. states, has since 2019 become a blockchain, cryptocurrency and digital assets paradise, leading the way among all U.S. jurisdictions in providing a clear - and advantageous – legal, regulatory, tax and investor privacy regime for investment vehicles focused on digital assets, including cryptocurrencies, non-fungible tokens (“NFTs”), digital tokens and certificates and other Web 3.0 asset classes. While the U.S. Congress, the Securities and Exchange Commission (“SEC”) and the Commodities Futures Trading Commission (“CFTC”) are developing a legal regulatory structure for crypto/digital asset classes that may be treated as securities or commodities (or both at once; see “Second Bipartisan Senate Bill on Crypto/Digital Assets Introduced” and other resources at Kurtin PLLC Information Technologies, Blockchain & Internet) or neither (for example, in the case of NFTs), we expect the existing securities/commodities regulatory and oversight regime to be adapted and generally apply. That framework assumed, since 2019, Wyoming has developed a really advantageous and cutting-edge regime for investment in crypto/digital assets and Decentralized Autonomous Organizations (“DAOs”), blockchain-based decentralized entities that make and implement decisions through the use of “smart contacts,” software code that executes programmed actions when data inputs are given and which can record the DAO’s ownership interests, governance structure and voting rights on the blockchain. We’ll first review Wyoming’s attributes as a jurisdiction to base a corporation, limited partnership (“LP”) or limited liability company (“LLC”), and then review Wyoming’s unique (in the United States) laws facilitating company and investment fund formation and investment vehicles focused on cryptocurrencies, digital assets and DAOs.
T: 212.554.3373 | E: [email protected] | W: www.kurtinlaw.com 1 USING WYOMING’S CRYPTO/DIGITAL ASSETS AND DAO LAWS IN COMPANY AND FUND FORMATION AND DIGITAL ASSET SECURITIES OFFERINGS September 2022 I. Executive Summary Wyoming, a northwestern U.S. state with a population of approximately 580,000, the smallest among U.S. states, has since 2019 become a blockchain, cryptocurrency and digital assets paradise, leading the way among all U.S. jurisdictions in providing a clear - and advantageous – legal, regulatory, tax and investor privacy regime for investment vehicles focused on digital assets, including cryptocurrencies, non-fungible tokens (“NFTs”), digital tokens and certificates and other Web 3.0 asset classes. While the U.S. Congress, the Securities and Exchange Commission (“SEC”) and the Commodities Futures Trading Commission (“CFTC”) are developing a legal regulatory structure for crypto/digital asset classes that may be treated as securities or commodities (or both at once; see “Second Bipartisan Senate Bill on Crypto/Digital Assets Introduced” and other resources at Kurtin PLLC Information Technologies, Blockchain & Internet) or neither (for example, in the case of NFTs), we expect the existing securities/commodities regulatory and oversight regime to be adapted and generally apply. That framework assumed, since 2019, Wyoming has developed a really advantageous and cutting-edge regime for investment in crypto/digital assets and Decentralized Autonomous Organizations (“DAOs”), blockchain-based decentralized entities that make and implement decisions through the use of “smart contacts,” software code that executes programmed actions when data inputs are given and which can record the DAO’s ownership interests, governance structure and voting rights on the blockchain. We’ll first review Wyoming’s attributes as a jurisdiction to base a corporation, limited partnership (“LP”) or limited liability company (“LLC”), and then review Wyoming’s unique (in the United States) laws facilitating company and investment fund formation and investment vehicles focused on cryptocurrencies, digital assets and DAOs. II. Wyoming as a Company and Tax Jurisdiction We reported briefly on Wyoming’s attractiveness as a fund and trust domicile in our “Special Purpose Vehicles (“SPVs”): Uses and Abuses” available at available at Kurtin PLLC Venture Capital & Private Equity. Wyoming is one of several U.S. states with no income tax (the others are Alaska, Florida, Nevada, New Hampshire, South Dakota (itself become a favorite trust domicile for U.S. and T: 212.554.3373 | E: [email protected] | W: www.kurtinlaw.com 2 non-U.S. investors by reason of its highly protective privacy laws), Tennessee and Texas. Wyoming also offers several other attractive outside investor attributes irrespective of whether digital assets are the object of the business to be formed: • Wyoming corporations, LPs and LLCs can be formed online, from anywhere else within or outside the U.S., using a Wyoming registered agent and then liberally structured in their charter documents to optimize their structure for investment fund, investor, investment asset, tax, accounting, governance and other business objectives. • Wyoming corporations, LPs and LLCs can be formed, owned and managed by natural and legal (i.e. companies) citizens of other states and other countries, with limited liability protection for equity holders: a corporation’s shareholders, an LP’s limited partners or an LLC’s members. • Wyoming corporations, LPs and LLCs can be vertically and horizontally “chained” - affiliated – with other corporations, LPs and LLCs, whether from Wyoming, other U.S. jurisdictions or offshore jurisdictions, and have governing organizations domiciled in other jurisdictions, onshore or offshore. For example, a Wyoming LP could have a Delaware LLC as its required general partner (or a Wyoming LLC could have a Delaware LLC as its managing member) to preserve Wyoming advantages while taking advantage of Delaware’s highly developed statutory scheme and jurisprudential interpretation of that scheme for company governance certainty and the potential attractiveness of that certainty for investors; and also have a British Virgin Islands (“BVI”) or Cayman Islands or other offshore jurisdiction company as its parent, with tax, accounting and further privacy advantages for investors, both onshore and offshore. • Wyoming LPs and LLCs can be formed, including as trusts, without any public record disclosing settler or beneficiary. Wyoming also permits trusts with generation-skipping transfer taxes and “self-settled” trusts (trusts formed by a person who also becomes the trust beneficiary). What makes Wyoming unique among U.S. states so far, however, are its laws enabling, facilitating and governing treatment of digital assets, including cryptocurrencies, NFTs and other digital assets, blockchain and DAOs. T: 212.554.3373 | E: [email protected] | W: www.kurtinlaw.com 3 III. Wyoming’s Digital Asset Laws A. The Wyoming Digital Asset Statute. In 2019, Wyoming became the first state to enact blockchain-enabling legislation and to establish the treatment of digital assets such as cryptocurrencies and NFTs as intangible property under Article 9 of the Uniform Commercial Code (“UCC”), which is enacted in all fifty states and the District of Columbia. The 2019 Wyoming Digital Asset Statute (W.S. 34-29-101 et seq.) (the “WY Digital Asset Statute”), as amended, defines: • “Digital Asset” as “a representation of economic, proprietary or access rights that is stored in a computer readable format and is either a digital consumer asset, digital security or virtual currency;” • “Digital Consumer Asset” as a Digital Asset “used or bought primarily for consumptive, personal or household purposes,” including open blockchain tokens constituting intangible personal property and any other Digital Asset not constituting a Digital Security or a Virtual Currency; • “Digital Security” as a Digital Asset that constitutes a security, as defined in the WY Statutes, but excluding Digital Consumer Assets and Virtual Currency; and • “Virtual Currency” as a Digital Asset “used as a medium of exchange, unit of account or store of value” AND not recognized as legal tender by the United States (in other words, the pending Presidential Executive Order inquiry into, among other things, creating a “digital dollar” would not be Virtual Currency under the WY Digital Asset Statute (see, “U.S. Executive Order Issued to Develop Cryptocurrency/Digital Asset Regulatory Framework,” March 10, 2022, available at Kurtin PLLC Information Technologies, Blockchain & Internet). The WY Digital Asset Statute makes clear that the definitions of “Digital Consumer Asset,” “Digital Security” and “Virtual Currency” are mutually exclusive; all are “Digital Assets,” but none are more than one of the subcategories at a time, with Digital Consumer Assets forming the residue category for Digital Assets not fitting into the Digital Security or Virtual Currency categories. T: 212.554.3373 | E: [email protected] | W: www.kurtinlaw.com 4 The WY Digital Asset Statute recognizes all three subcategories of Digital Assets as intangible property within the general Wyoming scheme of property rights, property protection and enforcement, sale, lease, licensing, assignment and any other disposition of property available to other forms of intangible property, and makes Digital Assets subject to Articles 8 and 9 of the Uniform Commercial Code (“UCC”) in which a security interest can be perfected, opposable in all U.S. jurisdictions. The WY Digital Asset Statute states that it is also to be treated as a consumer protection statute under Wyoming law. Critically, although the statute allows for the typical UCC Article 9 financing statement for perfecting a security interest in intangible property, it provides that perfection of a security interest in Virtual Currency can be achieved through possession, and in a Digital Security by control, giving the holder of such a perfected security interest priority over a security interest by a party that does not have possession or control, as the case may be. To achieve possession or control, and therefore the priority security interest, the secured party must enter into a security agreement with the debtor and any other necessary parties. The security agreement may provide for the priority secured party to pledge its security interest as collateral in another transaction. After two years, a transferee for value of a Digital Asset for value takes it free of any security interest in the absence of actual notice of an adverse claim. The WY Digital Asset Statute further makes provision for use of smart contracts by secured parties to achieve the necessary “control” or “possession” in Digital Assets. The WY Digital Asset Statute further establishes an opt-in framework for bank custodial services for Digital Assets and a jurisdictional framework of Wyoming courts over Digital Asset disputes. The optin for bank custodial services enables use of Wyoming SPVs as investment fund vehicles holding blockchain digital assets, NFTs and cryptocurrency as fund assets, in which investors within and without Wyoming can invest. Anti-money laundering, accountant and audit provisions are also included. The Wyoming Digital Asset Statute provides for a Wyoming bank providing custodial services to enter into an agreement with its customer as to the nature of its custodial arrangement: (i) whether the custody is a bailment, whether of a fungible or non-fungible Digital Asset, in which case the bank must strictly segregate the Digital Asset from other assets; or (ii) a statutory bailment authorizing the bank to enter into transactions with the Digital Asset based on customer instructions. Further, the bank and its customer must agree in writing specifying the source code version the bank will use for each Digital Asset and each Digital Asset’s treatment under the UCC, with any ambiguity to be resolved in favor of the customer. Various notice requirements on behalf of the bank to its customer are also included. Finally, the WY Digital Asset Statute authorizes each bank opting in to Digital Asset custodial services to operate a trust department to perform those services. T: 212.554.3373 | E: [email protected] | W: www.kurtinlaw.com 5 The WY Digital Asset Statute was amended by adding a new section 106, called the “WY Utility Token Act,” classifying open blockchain tokens whose primary purpose was consumptive (i.e., not as a currency or medium of exchange, etc.) as intangible personal property and therefore a Digital Asset. B. The Wyoming Decentralized Autonomous Organization Supplement. The Wyoming Decentralized Autonomous Organization Supplement (the “WY DAO LLC Statute”) was enacted as Wyoming Statutes, Title 17, Chapter 31, in 2021. The WY DAO LLC Statute defines a “Decentralized Autonomous Organization as an LLC organized under the statute. It provides for the recognition of DAOs as LLCs separate and apart from ordinary Wyoming LLCs, although with separate and additional requirements from those of traditional LLCs. A Wyoming DAO LLC may be formed by one or more members for any lawful purpose, and the person forming the DAO LLC need not be a member; i.e., an attorney or registered agent can form the DAO LLC. The WY DAO LLC Statute requires a DAO LLC to state its status as a DAO LLC in its Articles of Organization, to maintain a registered agent in Wyoming and identify itself as a DAO LLC in its name as a DAO, DAO LLC or LAO (Limited Liability Autonomous Organization). Existing LLCs may also convert to DAO LLCs. The law specifically extends the LLC limited liability protection for members (the LLC equivalent of shareholders) to the DAO’s members. The DAO LLC must also include in its Articles of Organization a publicly available identifier for any smart contract used to manage, facilitate or operate the DAO LLC. Typical (for traditional LLCs) elements must also be included, such as members’ rights and duties vis-à-vis the DAO LLC and each other, voting rights, transferability of membership interests, withdrawal from the DAO LLC, distributions of profits and losses to members, amendment of the Articles of Organization and any smart contracts, dispute resolution and others. The Operating Agreement itself may be a smart contract, and management may be vested in the members or any smart contract. The WY DAO LLC Statute differs from the main WY LLC statute in requiring notices in the DAO LLC Articles of Organization or Operating Agreement to the effect that the company is a DAO LLC, that its members may have different rights from member rights in traditional LLCs. DAO LLCs may restrict or eliminate fiduciary duties, transfers of membership interests, member withdrawal from the DAO LLC, return of member capital contributions and dissolution, all of which should be memorialized in the DAO LLC Operating Agreement, particularly to the extent more restrictive than equivalent member rights in a traditional LLC. DAO LLC Articles of Organization and Operating Agreements should be carefully customized to take advantage of these potential attributes unique to DAO LLCs. T: 212.554.3373 | E: [email protected] | W: www.kurtinlaw.com 6 The WY DAO LLC Statute provides for a DAO LLC to be member-managed or managed by an smart contract when “algorithmically managed.” For algorithmically managed DAO LLCs, the enabling smart contract must be able to be modified or amended. A combination of human, contractual, statutory filing and smart contract governance structures may be used, emphasizing the nature of the WY DAO LLC Statute as a technological-legal/regulatory “sandbox” for blockchain legal entity development. Membership Interests in a WY DAO LLC are calculated by dividing a member’s contribution of Digital Assets to the DAO LLC by the total amount of Digital Assets contributed to the DAO LLC at the time of a vote, with non-contributing members at the time of a vote having one membership interest and one vote. Other WY DAO LLC Statute provisions emphasize the differences between DAO LLCs and traditional LLCs. DAO LLC members have no right to inspect or copy company records if the information is available on a public blockchain, and the DAO LLC has no obligation to provide information to members about its capital finance, activities or other attributes to the extent available on public blockchain. The DAO LLC must be domiciled in WY; the WY DAO LLC Statute provides that the Wyoming Secretary of State shall not authorize a foreign (non-Wyoming) DAO. In the event of conflict between Operating Agreement and smart contracts, the smart contracts govern in almost all cases. DAO LLCs must be dissolved if they do not approve any proposals or take actions within a year, or are not under the control of at least one natural person. A DAO LLC must also be dissolved if the WY Secretary of State deems it “to no longer perform a lawful purpose.” IV. Using the WY Laws to Form Companies and Investment Funds and Offer Digital Assets for Sale To put all this together, a company or investment fund of whatever kind can form a WY SPV, whether a corporation (perhaps to serve as an onshore blocking entity, since WY has no income tax), an LP or an LLC, and including a DAO LLC and create an enterprise or fund vehicle to buy, hold, broker and sell assets, including Digital Assets, of whatever kind: a Digital Consumer Asset, a Digital Security or a Virtual Currency, engage a Wyoming bank to perform custodial and/or brokerage services typically needed by such a company or fund. The Wyoming SPV can perfect a security interest in the Digital Assets it buys, holds, hypothecates, pledges, uses as collateral to pledge or secure another interest or sells. T: 212.554.3373 | E: [email protected] | W: www.kurtinlaw.com 7 The Wyoming SPV formed as the company or investment vehicle can be a standalone entity or chained to a hierarchy of onshore and/or offshore entities; in either case, it, its owners and its investors will benefit from leading edge privacy rules and regulations. The enacted bank regulations and court jurisdiction give a regulatory and enforcement framework for running the investment vehicle and fund with certainty and security. Some examples of Wyoming enterprises and funds that could be set up to benefit from Wyoming’s favorable legal, regulatory and tax climate include LLCs or LPs, whether functioning as SPVs or not, and whether standalone or part of a chained hierarchy of Wyoming and/or non-Wyoming (U.S. or offshore): • A Private Equity, Venture Capital or Hedge Fund to raise capital, including Virtual Currency, and then invest it under one or another of the registration exemptions for raising capital under the Securities Act of 1933 (see our “Raising Capital through Private Placements: Deal Points” and “Raising Capital through Private Placements exemption chart, available at Kurtin PLLC Raising Capital or Kurtin PLLC Venture Capital & Private Equity. • A company or fund formed to offer and sell Digital Securities, such as digital tokens and certificates; • A company or fund formed to engage in cryptocurrency mining and trading; • A Digital Asset brokerage; • A company or fund formed to buy, hold and sell NFTs or other Digital Assets; • A company or fund formed to serve a financial engineering function in a larger consortium of enterprises by, for example, isolating assets and liabilities so as not to have them appear on a parent company’s balance sheet; • A DAO LLC used with or without smart contract governance mechanisms to achieve unusual (for onshore) levels of privacy for a company or fund; or T: 212.554.3373 | E: [email protected] | W: www.kurtinlaw.com 8 • A company or fund formed to buy and hold a portfolio of Digital Assets and other, more traditional intangible property, such as intellectual property like patents, copyrights, trademarks and other IP assets. Among many other potential applications. Until other U.S. jurisdictions catch up, for anyone seeking to form an investment fund or vehicle to buy, hold, trade or sell digital assets, including cryptocurrency, Wyoming has to be a very favored choice and destination. Owen D. Kurtin Kurtin PLLC is a New York City-based law firm focused on corporate, commercial and regulatory representation in the Biotechnology & Life Sciences; Communications & Media; Information Technologies, Blockchain & Internet; Satellites & Space and Venture Capital & Private Equity sectors. Among our key values, none rank higher than creative and individualized solutions to business issues, absolute client discretion and unsurpassed responsiveness. Since our founding in 2008, we have represented clients in over forty countries on six continents and across the United States on transactional and dispute resolution matters. 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