Commentary-6

The subscription of minimum capital, with a large amount paid up front before the commencement of business, has typically been a mechanism to prevent the abuse of the privilege of limited liability. The policy objectives of having a minimum capital requirement include protecting creditors, signaling the availability of certain assets to meet the claims of creditors (particularly involuntary ones who cannot bargain for better protections), preventing the frivolous formation of limited liability companies, demonstrating that a new business is credit-worthy and nudging directors to recapitalize an undercapitalized business.[^34] However, as is current practice with private limited liability companies in several jurisdictions,[^35] we do not see minimum capital subscription as being necessary for DAOs, due to its inadequacy in serving its main intended purpose: protecting creditors from members and fiduciaries siphoning assets.[^36] In the European Union, the Centros judgment has made clear that companies are free to circumvent minimum capital rules by registering in a foreign jurisdiction which provides lower minimum capital requirements, given that there are other mechanisms to protect the interests of creditors.[^37] The paying-up of a portion of minimum capital prior to the formation and operation of a business does not prevent the business from returning the cash of promoters as a salary, in exchange for goodwill or as a loan soon after it becomes operational.[^38] Nor are the sums committed to these businesses typically sufficient to meet the claims of unsecured, involuntary creditors, such as employees. Voluntary creditors do not look towards minimum capital to determine the credit-worthiness of a business but instead concentrate on other metrics such as net worth or cash flow, as well as the business's ability to furnish security. Given existing market-based challenges and formation requirements imposed by this Model Law, we do not see a justification for creating an additional barrier to entry to small, under-resourced DAOs in the form of a minimum capital requirement, particularly where such a requirement is rapidly falling out of favor for the reasons discussed above.

Instead, as the inherent technical features of a Permissionless Blockchain and this Model Law require a DAO's software code, On-Chain Assets and transaction records to be publicly available (Article 4(1)(e)), the financial position of a DAO and the risks inherent in it are made transparent to any creditors. As such, the signaling functions of minimum capital requirements are achieved through technological means. Furthermore, DAOs have diverse mechanisms for entry and exit designed according to the needs of their Members, such as withdrawal of Tokens (akin to the withdrawal of shares in cooperatives in the UK) or the transfer of TTokens to third parties (akin to the transfer of shares in limited liability companies). We believe the law should allow for this flexibility to protect the interests of Members with minority Token holdings.

We anticipate that one of the critiques of not having a minimum capital and granting limited liability to DAOs will be that it will allow an insolvent or near-insolvent DAO seeking to exploit its undercapitalization and the limited liability of its Members to engage in risky ventures that could, among other things, lead to tort liability. Due to its poor financial position, such a DAO may not be able to meet tort claims, while shielding Members from liability. However, multinational corporations engage in such risk transfer practices on a regular basis. The financial position of a DAO will be transparent to all stakeholders due to the existence of a GUI that can be used to examine its Assets (Article 4(1)(e)). To assuage concerns regarding economic credibility and creditworthiness, a DAO that seeks limited liability protection for its Members may consider maintaining relevant insurance coverage or reserve funds in escrow to satisfy such claims.