Disclaimer: I am neither a lawyer nor a tax advisor. This article is not legal advice. This article is not tax advice. This is a series of articles on research into regulations and information for Non-Profit Decentralized Autonomous Organizations (DAOs). For those unfamiliar with DAOs, we recommend starting with our previous article titled DAOs 101. If you still need to read parts 1,2 and 3, please find them below.
For those who have been following along, I must apologize for pivoting. In the last article, I stated that I would “…look into the tax forms for 501(c)(6) and any additional items.”
However, my excitement and lofty thinking have taken hold of my fingers and, thus, the keyboard keys. Here we go again.
In Non-Profit DAO Research- Part 3, you could read the hope-draining from my body. Specifically regarding the feasibility of becoming a 501(c)(3) Unincorporated Non-Profit Association (UNA). I wrote things like this.
While my superficial understanding of the regulations is helpful, when the rubber hits the road, one question exists. Will my DAO get approved to be a Non-Profit?
A harsh reality is that a DAO could do all of this work, and the Internal Revenue Service (IRS) does not recognize them as a public charity. This creates uncertainty in the Web3 space. However, some great resources and people are trying to help get legal clarity for DAOs, and I genuinely appreciate those tools and organizations. One of those resources (the Lex Clinic) opened my eyes to another type of Non-Profit designation, the 501(c)(6).
So hope is not lost for the 501(c)(3); in my opinion, certain DAOs may meet the IRS-defined exempt purposes. It all leads us back to questions, though. Will my DAO get approved? How hard would it be to obtain this designation? How much money would it cost, etc.? Those questions equate to money in terms of the necessity for legal and tax clarification.
While these are still true and the uncertainty exists, I stumbled upon two things. The first is a three-line sentence on the IRS’s website. The sentence reads as follows:
The first stage in the life cycle of any organization is its creation. A nonprofit organization may be created as a corporation, a trust, or an unincorporated association. Any of these entities may qualify for exemption. Note, however, that a partnership generally may not qualify.
One more time, “…an unincorporated association. Any of these entities may qualify for exemption. Note, however, that a partnership generally may not qualify.”
We would be doing this as a DAO in our specific context. We would not be forming a partnership but becoming an Unincorporated Non-Profit Association via the UNA. How would we be doing this? I mentioned this in another article using a tool called wrappr.wtf.
What led me down this Non-Profit rabbit hole for DAOs was my article, Wrappr: Liability Protection for DAOs. In that article, I spoke about an innovative approach Wrappr.wtf is using to help with legal liability. They have created a “legal NFT minter” that mints a token and provides DAOs “…with limited liability” and allows them “…to own IRL assets by representing legal entities.”
Essentially we would purchase a Non-Fungible Token (NFT) and place it into the DAO’s wallet. Okay, so we would be forming a UNA, but here is where I believe the rub is with our tax and legal friends. Just because you say you are a UNA and the paperwork you minted says this (below), does it mean you are doing it?
The proof is the pudding. Even though we are explicitly saying that we are operating exclusively for educational and Non-Profit purposes, the DAO has to walk the walk and talk the talk.
In other words, our actions also have to support that what we are doing is valid. So I reached out to get some different opinions, and they concurred. A source who will remain anonymous mentioned this.
“Judging private benefit is more about whether the activity mimics a for-profit effort than how it is framed out written into the docs…”
In other words, we needed a precedent. We needed to show that our mission is, in fact, in alignment with other real-world 501(c)(3) organizations.
If only there was a Non-Profit 501(c)(3) organization that tested out things and wrote reviews on them for the benefit of others! That would help our DAO. We would then have a direct correlation and mimic a similar organization.
Enter an OG……….501(c)(3) Consumer Reports.
“No fake reviews. No Advertising. We buy everything we test. 100% unbiased for over 80 years.”
“We buy and test thousands of products every year to generate reviews and ratings to help consumers, support our investigative journalism and trusted consumer guidance, and advocate for consumer-friendly marketplace practices.”
This is precisely what our DAO is doing, but for DAO tools in Web3. We will be using the DAO tools, testing them out, and offering those reviews for free to help potential consumers. Instead of televisions or cars, we will be testing the best DAO tools.
ELI5’s tagline could quite literally be “The Consumer Reports of Web3.”
These two discoveries lead me to believe that:
1. A unincorporated association could become a tax-exempt organization (but there is uncertainty).
2. We have a precedent in the real world that could help justify our reasoning that we are, in fact, a 501(c)(3) entity.
To Silo or Not to Silo…That is the Question
With some information that this could be potentially possible, questions arise with structuring. The go-to article for this is A Legal Framework for Decentralized Autonomous Organizations, written by our friends over at a16z crypto. This article focuses explicitly on UNAs and mentions siloing techniques at the end of the article.
Another spectacular resource is the actual Act itself. Here our friends at the Uniform Law Commission are a great resource. While I haven’t found the 1992 Unincorporated Nonprofit Association Act, they do have the amended Unincorporated Nonprofit Association Act of 2008 available. The act talks about the application of UNAs and calls out their use case in the United States.
Where does this leave me? With more questions. Is siloing the right choice, am I correct in saying that ELI5 could become an Unincorporated Non-Profit 501(c)(3)? Would we be the first to do so? Could this be a precedent for other Non-Profit DAOs to follow? Who will help me on this journey? It seems like this rabbit hole may have a few more layers for me to explore.
“Why, sometimes I’ve believed as many as six impossible things before breakfast.”
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