Alright, hello everyone, this is Sandel Podcast number 57.
Today is February 3rd.
And today we will be discussing part two of the mini series I've been doing into foundation
companies, which have been is the backbone of the legal backbone of the sandbox Dow
Foundation.
And it's led us down a really interesting, really interesting path.
We started just with what we thought was sandbox foundation turned out to be foundation company
legal entity that turned out to be one, one part of the Dow ecosystem.
And here we are part two, talking with Ernest, the scope of the talk, Metastreet Journal
in the chat, and I hope you are right on time.
So the scope of the talk today is an analysis of the facts.
All these facts are public things that you Google search yourself just right alongside
us.
None of this is an accusation or smear campaign of any kind.
And this is meant to explore the transparency and deliver on transparency goals when it
comes to what is it that we are participating in our ecosystem and our Dow.
Ernest and I do not represent the sandbox game or the sandbox foundation.
You're not your financial legal advisors and nothing we say is to be taken as financial
or legal advice.
If we say the word SIP, we mean sandbox proposal.
We say the word Dow, we mean decentralized autonomous organization.
And if we say SanFam, we're referring to the sandbox community, those who participate in
the people, product and purpose of the sandbox ecosystem.
That ecosystem looks a little bit like this.
Everything from the people sector, the gamers to the sandbox team, the product side is everything
from the game client to the Dow.
The purpose is what's mentioned in the white paper, as well as what's been expounded upon
by the leadership, Sebastian Bourget, Arthur Madrid, Yeh Su.
All of that comes together to form the ecosystem.
Today's episode is squarely on the Dow portion under that blue product sector.
And today I have with me Ernest Lee, who is a well known figure in the Apecoin Dow.
And there's a lot of crossover between the sandbox and Apecoin.
And I met Ernest through Bulls on the Block quite some time ago.
And he's established himself as someone who is knowledgeable in the legal side, which
is not at all a coincidence when you find out that Ernest is actually a practicing attorney.
So Ernest Lee is part of many, many things in the Apecoin Dow.
Board counsel, board capital, there's a lot of stuff.
So I'll let Ernest introduce himself.
Ernest, if you wouldn't mind, tell us a little bit about your background.
Sure.
Thanks, Lancer.
I'm an attorney, like Lancer said.
I'm also an accountant.
I run two tax practices.
I have a law firm that I run.
And legal, we rebranded from Ernest Lee LLP this year to focus on Web 3.
That's what we do.
We do a lot of trademarks, business formations, LLC, partnership agreements, formation of
DALs, all sorts of things.
Then I'm also a partner in board counsel, which is a Web 3 consultancy firm that I run
with Aaron Haber, who's a board ape.
And Aaron and I met at the Apecoin Dow.
We were both running for special counsel.
And we were similarly aligned in our ideas about how the Apecoin Dow should function.
And so, yeah.
And then I, like you said, I have a few other businesses.
I run an investment fund and invest heavily in digital assets.
And I have a motorcycle company that builds some of the coolest motorcycles on the planet.
So there you go.
Used to be a rodeo guy, bull rider.
Yeah, I was a pickup man in the PRCA for about 12 years.
So Ernest's background goes far, far and wide.
Not just a paper pushing tax collecting attorney.
He's got a long story background.
I had closed a deal.
My investment fund, one of the very first things we invested in, we bought used espresso
equipment from Starbucks and resold it on the market in a company that I funded.
And I was a partner in.
And then when that deal closed up, I had some time on my hands.
I was doing tax for private equity.
So I had roughly 11 months out of the year that I didn't have to work.
And so I started working in rodeo, essentially just started showing up to rodeos and they
put me to work.
Eventually I got my card to pick up and I started picking up in PRCA and PCA rodeos
in the southwest or southeast circuit.
And so yeah, I did that when I lived in Florida.
But I met one person after another that needed help on their taxes in rodeo.
And they're a peculiar bunch.
They don't make a lot.
I'll just say that.
But they have a lot of expenses and that's why.
They have a lot of write-offs for travel expenses that aren't what you ordinarily see in travel
expenses.
So I helped them with that.
I did for a little while, I worked on doing some sponsorships for them.
But I found my niche doing taxes for rodeo professionals.
And so we built that practice to a little over 500 clients.
And then I took one of my staff, I made her a partner in the firm and she runs that firm
almost autonomously.
I mean, we talk three or four times a week, but she does a really bang up job out there.
And so I took one of the staff that we were using at rodeotax.com, rodeotax, and we moved
him over to Decrypted Tax when I founded Decrypted Tax in 2020, doing taxes for individuals and
businesses with digital asset exposure.
Our first client was a kid who was mining Bitcoin in his basement.
His father was a friend of mine.
And he said, my son, 16-year-old kid, had made a substantial sum of money, more than
$50,000 that year, mining Bitcoin on a laptop in 2012.
And so I helped him figure out his taxes.
I gave it to Lincoln.
And I told Lincoln, hey, I don't know what kind of trading cards this kid has, but he's
made a bunch of money doing it.
So I need to figure out his taxes.
And so- And thus it began.
And thus it began.
Yeah.
Year after year, we got more and more clients in rodeotax that had digital asset exposure,
because they'll invest in anything.
I mean, these guys are doing anything they can to get up and down the road.
If it's selling Monavy or any number of different things they sell, they do whatever they can
to keep their expenses paid.
And crypto was one of them.
And so I just kept giving clients to Lincoln until we developed a book of business big
enough that we could spin off into its own firm.
That's what we did.
In 2020, we spun off there.
And then I went in pretty deep with investing in Bitcoin primarily, but also a whole bunch
of other altcoins in 2020.
But then it'd be about 2021-ish I got out.
When Bitcoin hit 63, I got out of digital assets and moved that into more traditional
loans and things that I was investments.
And then again, in 2023, beginning of, I got back into Bitcoin at, I think my blended average
is about 27.
So, I mean, even with this little hiccup we've had here with tariffs, I'm still doing okay.
So Ernest and I, I think I mentioned now and again when I'm in Sandbox DAO is that I am
an ape holder as well.
I'm a fellow monkey JPEG.
And Ernest and I really didn't really connect until he asked me to be a co-author on an
AIP.
So AIP 553 was the reset AIP we came up with.
So that's where Ernest and I started to connect a little bit more just professionally and
socially.
And now when we go to BOTB, Bulls on the Block, which Ernest has recently acquired and is
expanding.
So full disclosure there, Ernest and I have that sort of connection to each other being
co-AIP authors in 8.0.
Yeah, yeah.
Lancer was, I really appreciate your help on that because it was a lot of research to
figure out what we needed to do.
We saw the revamp coming and we're responding to that a little bit.
And we saw that there was some things that could be adjusted within revamp.
We didn't have a lot of context to reach out.
Well, we did it when we had context to reach out.
We just didn't feel that we were getting the responses we needed.
And so we put up our own AIP the way that we thought you, Aaron Haber and I thought
that it would be better.
And end of the day, hey, we're bam, reached out.
We got together and roughly 75%, 80% of the changes we suggested were incorporated in
the new revamp that just passed.
Yeah.
Yep.
Was it 554, 552 just passed, which is revamp AIP, not to be confused with our reset AIP.
And so ours is still an admin review.
Yeah, admin review.
And so, yeah, I really enjoyed working on that.
For those of you who are on the SanFam side of the house, our reset AIP that I'm co-author
on is similar in spirit to the community council, SIP, that we're doing.
It had a lot of transparency, type role and responsibilities, similar somewhat to what
the community council would be doing as well.
Okay, cool.
Yeah.
And then everyone, I'm Lancer.
I'm the podcast host.
I'm a publisher for Sandbox Game, having put two experiences and one of them made it in
Alpha season four that just concluded.
So it's like kind of making it into the Superbowl for the Sandbox.
I really still can't believe that we made it into that.
And yeah, I've been doing this mini series on the Sandbox Foundation because of my background
in business, entrepreneurship.
I've owned my own corporations for quite some time now.
And I'm just, I enjoy the business side of things.
So naturally when I see the Dow and I read that there's a corporate entity behind it,
that sort of thing intrigues me.
What is that made of?
How does that work?
This is part two of that.
All the research that we have gone, that we have went through for this mini series is
contained mostly within the reading of Cayman Island law and those seven different laws
right there.
So looking at Cayman Island online tools, looking at their regulations, and then going
through a lot of expert opinions, blogs, article posts, opinion pieces, and then Google searches.
Today we went in just a little bit different of a direction.
Whereas part one, we did a recap of the birth of the Sandbox Dow and we went to our research
and everything I just went over and we applied that in our regulation stack.
We looked at what a potential flow chart would look like for creating a foundation company,
and different terminology comparisons between all the different laws.
We used different terminology even though sometimes they meant the same thing.
TLDR and some remaining questions.
Part two today is a little bit more of a zoom out.
With Ernest, he's an attorney based in the United States.
We're going to be looking at some case law.
Most of the case law that you hear about, sort of stuff that scares Dows right now,
almost all of it is in the United States and all of it is in one state.
So we'll go over that.
One state has been causing all this trouble.
Yeah, nobody can guess which state that is.
So we're going to go over where those are right now and what they could mean.
And that's what will tap into Ernest's thoughts on the matter.
And then we'll look at what still remains to be decided.
What are some key facts that could really be some more things that we need to watch
out for?
And then last but not least, we'll do a comparison of corporate structures that are similar in
nature to foundation companies.
And you can kind of get an appreciation for when I say foundation company that came in
islands.
And if you're interested in that, go back to episode 55.
Right?
Or 56, excuse me.
So look there and you'll see the foundation company, the Grand Canyon Islands.
But here we're going to look at some US entities and then also a non-US entity that we found
that also has made its appearance in Dows.
All right, we're going to run through a recap of episode 56, which was foundation company.
This is not going to take very long, but we're going to recap it.
So back in episode 34, we did the Sandbox Dow relationship map where we kind of did
a narrative unearthing of where we thought all of the corporations and legal entities
played with each other, that they are associated with each other, what role they had in the
Sandbox ecosystem.
We also coincidentally led us to the Apecoin Dow by way of the Cartan Group, which was
involved with the Apecoin Dow from the very beginning.
It also led us to how the Sandbox company was related to Animoca Browns and the different
structuring that happened over there.
And then last but not least, how the different groups, Travers through Alburga, Maples Group,
International Corp Services Limited, International Protectors and Advisors Limited, Arasakyo,
perhaps Sleet Collective, although I think maybe I oversold their involvement.
Maybe they're not as involved as I thought.
Cartan, how all they played a role in the founding, no pun intended, of the Sandbox
Dow Foundation.
So that was one episode.
And then we went into what all that meant.
In episode 34, I thought that everyone, what we found out that most of those entities were
on the same street on the Cayman Islands, right?
The same street and in some cases, two buildings next to each other.
So that nice little blue building on the left and then the really teal aqua building on
the right, that's like most of the Dow for the Sandbox Foundation right there.
And so at first I thought, we thought that there was something significant about, you
know, just personal associations.
It's a small island, kind of like a small town feel.
That is the business district in Georgetown.
However, upon closer inspection of the rules, that doesn't seem to be the case.
It actually seems like it is structured that way because of the requirements by the Cayman
Islands and their acts and regulations in their law.
So you have to have in management services, they have to be properly licensed.
Director has to be properly licensed.
Attorney has to be in a very specific place.
Even the way legal counsel is sought after and then management services, all of these
things have different requirements you have to abide by.
And so less about, you know, them all being next to each other because maybe they grew
up together and maybe more about their resume for how they are able to fulfill the positions
in accordance with Cayman Island law.
We did a deep dive into that law in episode 56 where we found out our sandbox style foundation
is an exempted company, specifically an exempted foundation company, which makes it applicable
to the Companies Act and the Foundations Company law.
And we looked at page five of our minimum association, which kind of gave us that background.
And then we went to our liability.
What does it mean to be a limited liability foundation company by guarantee without any
share capital?
And again, we consulted the member of association to give us that, that we were to triangulate
where we were within Cayman Island law.
Then we went over in depth the reg stack are also called a law regulation stack.
Basically how do all of the rules, regulations and laws, how do you stay legal so that when
the foundation company is authorized to be a foundation company, you know that you've
done all the things you're supposed to for Cayman Island law.
So that was the Companies Act, Foundation Companies Law, Companies Management Act, the
Director's Registration Licensing Law, the Securities Investment Business Law, the Virtual
Asset Service Provider Act, and the Citations of Act of Parliament Law.
So that's seven bodies of law that we went through for episode 56.
And then we said, you know, part two, we would look at case law and then part three would
look at a professional law firm who is in Cayman Island.
That'll be part three with Walker's Global.
And then when you look at all of these documents, now you suddenly can see just what these terms
mean, Articles Association, Foundation, Foundation Company Limited Blood Guarantee, Exempted,
Assistant Registrar, Acts and Regulations, Subscriber.
That was an important term that we found out just how important it really was without any
share capital.
All these things we suddenly found when we are reading our own sandbox foundation documents,
they suddenly had a new meaning for us.
And then we went through the Foundation Company creation flow chart.
And that was just me based on what I had read through what I thought was going down.
And we went through how the Dow wanted to become a, when a Dow wants to become a foundation
company, all the steps that it took to get to where you were actually Dowing like we
are right now, like the company is at day to day in the Grand Cayman Islands.
And this is basically my best guess.
And this is what we'll go over a little bit more in depth with part three, when we have
the Walker's Global to kind of fact check everything that I think was going on because
there's still that big rectangle of confusion over here over what do these roles, how do
they interact with each other on the daily?
And how does the body of law play out in real life with all of these people?
And then the last one at least was the TLDR.
Foundation Company is both the name of our sandbox Dow and a type of company in the Cayman
Islands.
It's flexible in how it's structured and how it's operated.
Exempted Company means the company that does business outside the Cayman Islands.
Limited by guarantee means members of the foundation can only lose what they put into
the company.
Without any share capital means no shares, which I explained means units of ownership
were created when the company was formed.
Articles and memorandum of association, they are the founding documents of a foundation
company, both of them together equal the constitution.
And memo creates the foundation company and articles will describe how it's to be operated.
Similar to in the United States, you might refer to as the bylaws, although not the same
thing because in the Cayman Islands, there are bylaws and they are not articles.
Bylaws are optional in the Cayman Islands.
And you'll find when we did our comparison with some United States stuff, bylaws are
not optional for some of the ones that we looked at here in the United States.
Lots of business being done in the Cayman Islands.
There were 900 companies registered in one month alone and there are 121,000 active.
And then subscriber and secretary roles are very important to the founding of a foundation
company.
Members, directors, officers, supervisors, managers, all seem secondary, although a supervisor
is required.
But the most important role seemed to be the subscriber and the secretary.
So that's the kind of the wrap of recap of episode 56, which was our research into the
Cayman Island law.
Today we'll be moving into case law, different sorts of court rulings and opinions that are
important.
And then you remember when I said that reg stack, that reg stack here, that's case law.
Case law is something that you use as interpretation, as guidance, and how the courts will sometimes
look at the bodies of law that are in existence and they look at different case law to see
how other judges have ruled in disputes.
So it's kind of like a dispute resolution reference book.
Ernest, did I describe that?
Okay, you're the practicing attorney here.
Yeah, I'm following along.
I'm going to chime in when I have anything significant to add, but you've nailed it.
Right on.
So now we're going to get into today's episode.
Case law is our first one.
Then we'll get into our comparison of what we found for Dow LLCs, LLDs, DUNAs, which
you've probably heard of, and then TRUS, how those play a part, and then we'll finish.
So case law, our case rulings and opinions, opinions.
Dow's getting sued is pretty much what I'm at when I'm after here.
So the court rulings for Dow's getting sued center around what we could find three court
cases.
There are many, many others, but these are the three that you hear a lot of.
Okie Dow, EZX, and Lido Dow.
Lido Dow is the one everyone's afraid of right now, this moment.
So Okie Dow was sued by a US regulator, the CFTC, commodities futures and trading commission.
They are a US regulator and Okie Dow was sued by CFTC in the state of California for not
registering in accordance with CFTC rules and was ordered by a US judge to shut down
and pay a $643,000 fine.
This was in June of 2023.
It was in the state of California.
And some key things that I pulled out of it, and we'll get Ernest's input here in a second.
Key thing I pulled out was that a person can be sued as an unincorporated association under
US California law.
And the key phrase was there was could be sued because at the time the judge didn't
exactly say I'm ruling on this because you are.
I am ruling on this because you didn't register in accordance with and I found all these things
to be true.
That a person that can be sued as an unincorporated association, a Dow, excuse me, a Dow can be
a person that can be sued as an unincorporated association under US California law and that
Dow members could potentially be seen as partners in a general partnership and can be liable
for the actions of other members under US California state law.
This statement right here will be very important for numbers two and three that will come up
here later.
Ernest, what do you think?
Yeah, that's about right.
So I mean, back up a little bit, you know, the 50,000 foot view.
Basically, you know, if Lancer and I were to decide we're going to enter into it, we're
not even just going to enter into it, we got a really good idea.
And we're going to start doing things to make money.
And then while we're doing those things, if Lancer were to, let's say if I did something
that didn't work and we got sued, Lancer could be held responsible for the things that I
did because we are entered in a common enterprise for profit.
And so that's basically what they're saying here is that unincorporated association under
California law would be seen as a partnership, a general partnership, and not a limited liability
partnership, but a general partnership.
And absent any other documents, to the contrary, the individuals could be held liable for the
actions of the other members of this general partnership.
And what is it significant?
Because to me, I didn't really, growing up, you hear corporations and LLCs and partnerships.
What is it that's significant about the general partnership that makes it so scary?
Well, general partnerships are scary if you've, I mean, if you're the reason, let's talk about
why you enter into a limited partnership.
If you're just a money partner, or if you're just providing the cash to do something in
a business, you don't want to be responsible for what they do with that money.
And so that's why you have limited partnerships.
Or if you're a services partner, so you're providing a service, let's say a law firm,
law firms are always set up as limited liability partnerships.
Not always, they're generally set up as limited liability partnerships.
And so when you enter into a law firm, you don't want to necessarily be responsible for
what the other attorneys in the firm are doing.
And so you have this structure and you have an agreement that you're only going to be
responsible for certain things.
What they're saying here in the Okudow case is that the individuals don't have an agreement
to say otherwise.
And therefore, they are an unincorporated, and because they're an unincorporated association
under California law, that they're potentially liable for the actions of the others as general
lawyers.
And this was in 2023.
So it was a US regulator up against a Dow.
And at the time, let's just say that the US regulatory outlook on things was, you could
say aggressive, but you could also say scrutiny.
There was a lot of scrutiny.
That didn't stop because there, number two, our second example, BZX Dow.
This was in March of 2023.
So same year, just a little bit sooner than Aoki.
BZX Dow was sued by a Dow token holder after a hacker stole Dow funds and the token holder
was unhappy with the repayment plan.
I believe the terms would take thousands of years to repay was used in the brief.
The legal opinion was issued paving the way for Dows to be construed as a general partnership.
Like I said here, and the Aoki Dow, this was an important point for later.
So this was March, Sarkuni v. BZX Dow also in the state of California.
And it's important to note, I didn't actually know this at the time until I read into a
little bit more, BZX Dow later became Aoki Dow or Aoki Dow.
So one-
Aoki Dow or Aoki Dow?
Aoki Dow, I guess.
I keep saying Aoki, not in any way, shape or form related to the DJ, but Aoki Dow.
So yeah, later BZX Dow became Aoki Dow.
Also they tried to name Aoki Dow in this one, but they seem to be unsuccessful at that part.
But in any case, Aoki Dow got targeted for another reason altogether.
They ended up having to shut down because of the way the ruling happened on CFTC, but
they were sued separately.
Their predecessor was sued separately by one of the token holders who lost money and didn't
like the repayment plan.
Some key phrases I pulled out of here was that, persons may unintentionally create a
partnership where their actions and behavior demonstrate an intent to engage in business
altogether.
I believe the term there was common enterprise.
When you're engaged in a common enterprise, you may unintentionally create a partnership.
And as Ernest was just commenting, that partnership can open you up to liability.
Or if one person goes, takes a $5 million bank note and defaults on a loan, are you
now liable as the partner in that business?
Is that partner acting within the bounds of their legal authority to make that company?
Absolutely.
Otherwise, yeah, you'd be held responsible for that.
That's one of the importance of a well-directed partnership agreement, which is what we do
at Board Legal.
Goodbye laws.
And the last part I took out was that allegations of mere ownership of governance tokens, whether
they were used to vote or not, is sufficient to overcome a motion to dismiss.
The reason why that's notable is you can't just say, well, I just voted once in a SIP.
I'm not going to use the word SIP because we're a foundation company.
We're protection in a much different way.
So you can't just say, because I'm a token holder, I voted once in a proposal that I'm
not, I can't be sued.
That was rejected in this legal opinion.
Well, it was rejected to overcome the motion to dismiss.
I mean, how is that important?
Motion to dismiss is a legal standard.
I mean, the legal standard for a motion to dismiss a state of claim is there is no set
of facts that could be presented to the court that would subject, would, you're typing as
I see it here.
Yeah.
There are no facts upon which the defendant, or I'm sorry, the defendant could be held
liable for the actions.
And so, yeah, so essentially, you know, if I sue Lancer for smiling at me in a weird
way during a podcast and I sue him and we go to court and the court says, you know what,
even if you prove that he smiled at you the wrong way, you're not going to be able to
state a claim.
There's no cause of action for the smile.
And so Lancer would probably successfully be able to put a motion to dismiss for failure
to state a claim and it would be, that's where it would go.
Now, if there's a fact that they could present a problem.
So if I said, you know, he smiled at me in a weird way and he said something about me
that wasn't true, that impugned my reputation.
Well, now, now I've stated a claim.
I mean, it's clearly a defamation claim.
It would be, if it was in relation to my profession, it could be defamation per se.
I wouldn't have to show actual damages.
But at the end of the day, now there are, there is something for the fact finder to
find that to determine whether the facts are, whether he actually did that.
And that would be, that'd be a way we have to get to move forward.
And even though Lancer would want to try to have it thrown out, it wouldn't happen.
Was there anything else about this particular case that stuck out to you?
Or is that, or is that the gist of it?
No, that's the gist of it.
I mean, it was fairly straightforward.
It's an application of old law.
I mean, it's not an application of old law.
I shouldn't say that.
It's an application of the state of the law.
This is the attorney part coming out of him right now.
Yeah.
I, yeah.
It's interesting how California is the one taking up all these cases.
California is a very, I don't know, the jurisdiction is difficult for firms seeking investment.
You got to be really careful if you're dealing in California.
The regulations are difficult.
We've heard about regulations in California for years.
I have anyway.
It's a place that some businesses choose to not even participate.
Some businesses choose to not sell products into California.
Because of that difficulty.
For instance, I for some time, I considered not selling into California because of their
emission standards.
Because their emission standards are a little bit more strict in California than there are
other places in the US.
And so I think it's a pendulum.
It'll swing.
It'll come back as you see with everything.
I mean, in crypto these days, you see a lot more move towards deregulation.
So for our third example, Lido Dow, that seems to be on everyone's short list of examples
nowadays is Lido Dow.
So what is going on with Lido Dow?
In November, 2024, a person named Samuels sued Lido Dow.
Lido Dow was sued by a non-DOW token holder.
It's an important point.
After he lost money buying and selling the token on Gemini.
Gemini is an exchange.
That case is still ongoing, meaning it hasn't been decided yet.
But what's notable here is that we're talking about a non-DOW token holder.
Someone just trading the token on an exchange.
He lost money.
We sued the Dow, want the Dow to recoup damages.
That is fascinating to me.
So here again, also in California, here I have a few phrases that pulled out.
Dow members are being treated as general partners under California law.
So at this point in time, what some judges opined on in their, what do you call it?
Presidents?
The what?
Presidents?
Sure, sure.
When the judge writes the opinion and decides the case.
Why am I blanking on that word?
The judge writes the opinion, decides the case.
Sure, the opinion.
So whereas originally these first few examples, there was a potential for that to happen.
Now it is happening.
A judge is treating, if you read the case law finding, he is treating Lido Dow members
as general partners under California law and can be held liable for activities of the partnership.
And that activity of the partnership is where things are currently battling.
The activities of the partnership is that even though the...
My little thing keeps jumping all over the place.
Fix that.
Okay.
Even though Lido Dow did not actually sell the tokens to this non-Dow token holder, the
court treated Lido Dow as a statutory seller because they solicited the purchase and they
had a long list of what that solicitated means.
It was how they ran ads.
It was how they kept on saying, you know, hey, buy the token.
So they decided that the judge here said that they adequately alleged, so Samuel's adequately
alleged that Lido Dow did solicit the purchase of the tokens by being a huge enabler of it,
by being a big proponent of it.
And some cases you might say we're stealing it in some common parlance.
So because Lido Dow was a big proponent of the token on Gemini, that's what made them
culpable, suable.
And that's what brought the Dow members in because they're treated as general partners
of the Dow and the Dow is being sued because of its involvement with the token.
Okay.
So if you're still with me in the last part here, Lido Dow was comprehensively involved
in the creation and issuance of LDO token and in efforts to get people to purchase it.
And that I pulled straight out of the text from the judge himself.
It was the same judge, by the way, where here Samuel's likewise pled solicitation because
he alleged that Lido Dow was comprehensively involved in the creation and issuance of LDO
token and the efforts to get people to purchase it.
He alleged that Lido worked to get crypto exchanges to list LDO and then a whole, whole
bunch of listings of stuff after that, that made it a statutory seller.
Okay, Ernest, what do you think?
I read this case.
Maybe I missed it because I just didn't focus on it.
But did the court make a distinction between a non-Dow token holder and a Dow token holder
for a reason?
I don't think they did.
I pulled it out of there because I noticed that this person did not allege that they
were a Dow member.
Okay.
It was to me different than the first two cases where one of them was a Dow member and
this one's not.
And yet both are successful.
Somehow they're both successful in suing a Dow.
But he becomes a Dow member as soon as he takes it out to a wallet, right?
I mean, so...
I think, well, in the actual case earlier, it said that Dow members are those who participate
in the governance.
Right.
And I didn't see anywhere where Samuel's participating in the governance.
I could be off there.
I wasn't looking for it specifically.
Yeah.
Okay.
I was just curious.
There's that lawyer in you again.
Yeah.
So, what is it about this one that is so scary to people, Ernest?
Well, I mean, this one, what is scary about this is that if everyone who owns a token
has participated in a common enterprise, it could cause a lot of problems.
I mean, imagine a fairly decentralized token.
I mean, I'm familiar with the Apecoin Dow, so I'll use that as an example.
They're roughly 80% decentralized, although there are pools of tokens.
The token has been fairly well distributed.
The Apecoin Dow and now the foundation holds roughly 20% of the supply, but they've been
sold out on the market.
And so, if a court in California were to rule that the actions of one Dow member were, I
mean...
Just the actions of the Dow in this case.
The collective Dow promoted its purchasing of the LDO token on an exchange.
And so, on the exchange or down in Vegas with the Apecoin guy walking around?
On the Gemini exchange.
I mean, something like that.
It's just, that's troubling.
Because then it would open you up to like unlimited liability at that point.
Yeah.
Everyone from anywhere is like, hey, I've been damaged.
I've been hurt.
Yeah.
It's a litigious world, man.
I don't take it lightly when I do file a lawsuit against anyone on my own behalf or...
As I have twice in my whole life.
Both times before I became a lawyer, by the way.
Oh, no.
No, once before I became a lawyer.
I did hire a lawyer for the other one.
But yeah, or when I file on behalf of a client, I'm careful about it.
It just seems like this opens up for a whole bunch of attorneys to come out and say, yeah,
this token went to zero and therefore all the Dow members are responsible for this one
guy's loss.
I mean, it hasn't been decided yet, so we'll see.
Hasn't been decided yet.
It's going rough though.
It's a little rough.
I'm taking bets against it.
Are you?
So out of the defendants, there were multiple defendants.
Andreessen Horowitz was one of them, the really well-known VC.
And there were some other VC type firms.
I think there were four or five defendants named by the plaintiff.
One of them successfully was able to show, demonstrate that they had, I don't know if
the word was negligible, but next to no activity in the Dow.
So they were able to get their motion to dismiss granted just for them.
But Andreessen and the other ones, their motions were so far denied.
So they were alleged to have taken part significantly.
And the person listed all sorts of stuff like on Andreessen's website where they had a press
article saying, we did all this stuff in the Lido Dow and trying to show the resume and
the credibility of their activity.
And that was cited as your involvement.
You clearly were involved in the Dow.
Whereas that fourth one was just like, hey, I just developed this little thing.
And can you please not sue me?
And then that motion was granted.
So okay.
But imagine how the state of the law would be if this case were to decide that the individual
token holders that are active in the Dow, like myself or you in the sandbox, I mean,
imagine the Apecoin guy's down in Vegas and he takes a swing at somebody because they
grabbed his butt or something and that guy slips and falls in front of a bus and gets
maimed or killed.
And so now they're going to come after Ernest Lee because he's active in the Apecoin Dow
and he's on a bunch of YouTube channels and podcasts and Twitter spaces talking about
his activity.
And he owns tokens and he votes his tokens and he has a delegation that votes tokens
and saying, we've got both the bulls and the block delegation and it's just, I mean, that's
a mess.
That's a big mess.
I don't think we're going down that road.
That's just my opinion.
Well, good news is the next slide is about opinions.
And some honorable mentions I pulled kind of out of the woodwork from just researching
is five crypto decisions from every 2023.
From 2023, every lawyer should know by Dynamis.
I mentioned there were many, many other different opinion pieces that you could look up or different
court cases.
Compound Dow was sued, Tornado Cash was sued, Dapper Labs was sued, Coinbase was sued, Uniswap
was sued.
And then I listened to BZX but ended up moving them up because of the importance of their
court case.
Also, I kept seeing the SEC's investigative report on July, back in July 2017, excuse
me, concluded that Dow tokens, a digital asset, are securities on the Securities Act of 1933.
I don't think anyone's surprised to hear that.
Chair Gensler, former Chair Gensler has said that quite a bit and that the Securities Act
Exchange Act of 1937, both of those are applicable to Dow tokens by extension and that tokens
meet the Howie Test.
And so you can go to on the SEC's website if you are so inclined and you can look at
the report still there.
It's a cool read.
I read it, but I'm a nerd so I like that sort of stuff.
And also April 2019, a little bit more recent, Framework for Investment Contract Analysis
of Digital Assets, also in SEC, it's on their website, but also in SEC publication.
It's a framework that they put out there for what they call investment contracts, but it's
applicable to like smart contracts and Dow tokens and that sort of thing.
And they go into detail under the Howie Test.
An investment contract exists when there is investment of money and a common enterprise,
that word again, with a reasonable expectation of profits to be derived from the efforts
of others.
Again, we're talking about the Howie Test.
And some other things that pulled out from that was that those who have a lead or central
role in the direction of the ongoing development of the network or the digital asset, that
also meets the Howie Test.
And that's also related to, I think, the statutory seller that we're just discussing and the
SEC recognized to the extent a protocol is sufficiently decentralized, as in Ethereum
versus ApecoinDAO versus what name your token.
But they recognize that to the extent a protocol is, in their view, sufficiently decentralized
is such that there is no single identifiable enterprise.
An investment contract is likely to result.
It's unlikely to result.
Yeah.
But I mean, I understand what they're saying, but I think that you're applying these rules.
And I understand concepts are concepts, whether they're 1933 or not.
And regulatory agency is not law, although administrative law, different subject though.
Right.
And so, protocol is sufficiently decentralized.
So I would argue that ApecoinDAO had 80%, 85% coming up is sufficiently decentralized
at that point.
I see some others that aren't.
But then you get, I mean, how does that apply to Bitcoin?
What happens if more and more accumulation happens through these ETFs and other high
net worth companies?
Like BlackRock, all the big funds start getting in and accumulating quite a bit of percentage.
Bitcoin, the gold standard, pun intended, of decentralization could become sufficiently
centralized.
I mean, you have less than 5% of the supply on the exchange, everything else being either
dead or being held by large individuals.
I mean, it could become a problem.
I don't think it will become a problem.
I think if this were the law of the land, it could become a problem.
That's what I meant.
Yeah.
This was the, again, not law by a judge, not law as in California.
It was the Securities and Exchange Commission both issued both the report and framework
to help communicate their stance, their position, which as you can tell in the past eight months
has shifted to a new chairman or chairperson means a new position.
Perhaps we'll see how that develops.
There's my three honorable mentions when it comes to the opinion side of how to approach
this concept of DAOs, structures, getting sued, all the sorts of stuff that liability
sort of stuff that we're talking about.
There's a question in the chat from Metaverse Street Journal.
With David Sacks, President Trump's AI and crypto czar, poised to hold a press conference
from the White House on digital assets in a few hours, what is your expectation?
It says the press conference aims to outline strategies for securing America's leadership
in the digital asset ecosystem.
Yeah, the strategic Bitcoin reserve is coming.
Whether it's coming with this announcement or it's coming later, it'll be there.
Trump talked about it on the campaign trail.
I was there in Nashville when he talked about it the first time.
I was there when R.K.
Jr. talked about a two million Bitcoin reserve, same conference.
It's coming and certainly the move that they made to the executive orders to not sell digital
assets that they currently had that had been seized.
Silk Road and the like.
And so, yeah, it's coming.
And you see it.
Utah committed to putting a percentage of its treasury into Bitcoin.
New York.
All across the country, you got these states and then recently I saw some investment funds,
not investment funds, from retirement funds that are putting a percentage in Bitcoin.
That's coming along.
Internationally, Checklist of Aja announced last week that it was going to start purchasing
Bitcoin.
The Czech Republic.
So I mean, it's a unit of measure.
Not so much a digital currency as much as it is just a store of value.
The Metaverse Street Journal also followed up to say, President Trump signed an executive
order today about a US sovereign wealth fund and it's now live.
Thank you.
Metaverse Street Journal.
And I appreciate your involvement.
Thanks for asking all the questions.
Roxy Miguel, one of our Dow delegates in the Sandbox Dow, asked a question, can a person
buy 5SAND, which is about $2.15 at the moment, that's the minimum to participate in the voting
in Sandbox Dow, and thus become a Dow member and be sued for something regarding LIDO Dow?
That's to say, if we were sued in California court, for instance.
Yeah, I don't see it happening.
And that's tea leaves, understand.
That's 100% tea leaves.
Me just guessing the state of the law, the way that it'll be applied.
No, I don't see that happening.
And that might segue into the bottom portion, which was some things that just weren't working
out in my brain was how is that some of these companies could be sued when they're halfway
across the world?
Like one of the companies that was sued was a German company, BZX, if I recall, was a
German company and they were sued in California.
So how was it possible that the CFTC had the jurisdiction over a German company?
And I started Google searching, you know, chat GBT, Jim and I try and rack my brain
to figure it out ahead of asking you.
And when I landed on, what it landed on was jurisdiction that how do US regulators have
jurisdiction over international entities?
Something called a long arm statute, the Conducts and Effects Test and the Dodd-Frank Act.
Are you familiar with those?
Vaguely.
Okay.
So, yeah, a long arm statute, it essentially gives jurisdiction where the effects of the
actions of an entity or an individual outside of the jurisdiction, outside of the ordinary
jurisdiction, geographical jurisdiction of the state.
In the case of California, which California likes to reach out and touch people.
It's a law that applies California law, for instance, to the actions of your German individual.
And so, I mean, I've had some experience with long arm statutes, but my primary experience
with long arm statutes are tax legislation, especially California.
California likes to tax on a worldwide basis.
So it taxes extraterritorial income the same way that the US would for its citizens.
California likes to reach out and tax the activity of its individual citizens, whether
the activity happened in California or happened in another state or country.
And I think that's because under the Conducts and Effects Test that it affects a lot of
people within their jurisdiction, being California.
And yeah, Conducts and Effects Test, where if it affects enough people, then it's said
that then the US or state can have jurisdiction over that extra entity that it normally wouldn't
have jurisdiction over.
Yeah, the problem with that is it's that is very murky.
And it's just very murky.
You apply that.
How can a company now in Germany situate its affairs in such a way as to not be subject
to California law?
What actions could it take to insulate itself from that activity?
And we get into a lot of this with a lot of these entities.
I set up entities in the Caymans for individuals that had regulatory risk here in the United
States.
I won't mention any of them because they're in business.
They're doing what they do.
Let's just say if someone had a website where they were gambling or doing something that
could be subject to US regulation, either state and local or federal, and they just
say, OK, well, we're going to deny IPs from within a certain country.
And natural property?
Yeah.
Well, I mean, it's just if you do that, now you've got NordVPN or whatever, you can get
around all those things.
And so really, it's just ministerial that you're doing it.
You really can't guarantee that US individuals aren't going to visit your website.
The last thing I found was the Dodd-Frank Act, which as a contract writer and negotiator,
I'd known about the Dodd-Frank Act for quite some time.
But what I didn't know is that in the Dodd-Frank Act, Congress, when they enacted that, Congress
means the US Congress, they amended the jurisdictional provision that said that federal securities
acts clearly indicate that anti-fraud provisions apply extraterrestrially when statutory conducts
and effects tests is met.
So our legislative body, Congress, decided to put it into law then that if conducts and
effects test is met, the long arm statute did hold.
And because we're the United States, we're big bad on the block, who's going to be like,
no, no, no, you can't?
So that to me, I wasn't expecting that sort of intersection with my own professional career.
And the Dodd-Frank Act does get cited quite a bit.
So yeah, that was my foray into how is it possible that the US can draw in a German
company, hold it to account in a California court of law, and then apply a penalty against
them as if they're a US resident.
So very fascinating.
And the connection to Cayman Islands, by the way, I briefly mentioned in episode 56, was
that the Cayman Islands is a British territory, British overseas territory.
And both the Cayman Islands and the United Kingdom has different information sharing
agreements with the United States.
They're mainly centered around tax evasion and breaking of securities laws.
But you can already see the link there for how they could apply that long arm statute
without intruding, let's say, where they would say, hey, you're definitely going to be part
of this suit in California.
They will use preexisting agreements between sovereign nations like Cayman Islands, United
Kingdom, to say, hey, this person was sued in the court system and per the agreement
that we established with you, information sharing and otherwise, you're required to
assist us in discovery and all sorts of legal things needed to convict someone in court.
So that was a fascinating intersection again.
Yeah.
Okay, let's get into last slide on opinions, which for Walker's Global, there is an article
written about how the Cayman Islands Foundation companies are the leading vehicle for wrapping
a Dow.
And here's where we'll start to get into our next phase of comparison with Foundation Company
versus DUNAS versus Dow, LLCs, LLDs, all that.
So this term wrapping a Dow, something that we've heard Coon say before, what does it
mean to wrap a Dow exactly?
So in the article, Walker's Global, they go on to say that unlike conventional companies,
a foundation company does not have to have shareholders.
That's a key phrase, does not have to have shareholders.
This provides a neutral shareholder free structure that aligns with a decentralized ethos of
DOWs.
And they kept saying wrapping a Dow, wrapping a Dow.
What does it mean to wrap a Dow?
We already talked about how shareholders are units of ownership and director positions
in the United States and Cayman Islands have a fiduciary duty to shareholders, which normally
is interpreted as maximize shareholder value.
So the members of a foundation company are subscribers.
They are not shareholders.
And with the BZX Dow ruling, a person may unintentionally create a partnership.
And my note was that limited liability companies, otherwise known as LOCs and corporations,
mean that shareholders and owners are not personally liable for debts and obligations
of the company.
But in some of these rulings, we're finding that members of these DOWs are being interpreted
as general partners and are in some cases thought to have unlimited liability, unincorporated
associations, all those sorts of stuff we just went over.
So wrapping a Dow has become a key phrase to say protection, to protect your Dow.
You want to wrap it.
And Ernest, let's just start with what is your perception of what people mean when they
say wrapping a Dow?
Well, wrapping a Dow, they mean having a...
So a Dow is a decentralized autonomous organization.
And so wrapping a Dow through having a foundation, having these entities, these individuals within
the foundation company, even though the foundation company doesn't have shareholders, you have
some type of legal structure, more of a legal structure than you do with a Dow.
I mean, I've seen and I've participated in DOWs that were literally just a bunch of guys
that had a multi-sig.
And they didn't have anything filed from any government and they just considered themselves
a decentralized organization.
And so wrapping a Dow like that would be having some type of legal framework like we're going
to talk about.
And where I thought foundation companies, when you start exploring this topic, just
what does it mean to have a type of legal structure underpinning your Dow or protecting
your Dow?
I've come to find out that wrapping a Dow means something specific.
At least I think it does.
And I didn't really understand that until we started doing the comparison of the different
types of Dow structures that there are.
And where they start talking about how the comparison of these different types of structures
give you different types of protection.
So the ones we're going to look into are Dow LLCs, LLDs, DUNAs, and trusts.
Now spoiler alert, some of these are kind of saying the same thing, but they're starting
to evolve into their own separate legal framework, let's call it.
And this is where it gets really fascinating.
And I didn't put foundation company because that was an episode all by itself.
This we're just going to focus on United States plus an extra that we found.
And coincidentally trusts got brought into this.
So a foundation, by the way, a foundation company in the Cayman Islands is those many
articles that I saw and show your research slide.
A lot of them interpreted foundation companies having the very best of a nonprofit, a company,
and a trust taking some of the flexibilities afforded through all three of those types
of structures and then calling it foundation company, which then applied everywhere.
But let's just focus in on these.
I didn't even know that some of these existed before I started Google searching.
So the first one, Dow LOC is kind of like a broad term and it means protection as a
company.
And Dow LOCs are limited liability companies, by the way, not just corporations or S corporations,
C corporations, S corporations, but a LOC can be thought of as protection.
The states that are currently offering some type of Dow LOC, Tennessee, Wyoming, Vermont,
Utah.
Okay.
So this is where we start getting to what is a wrapper versus what is a non-wrapped
Dow or whatever.
Tennessee, Vermont, Utah, Wyoming.
It seemed to me that when I was reading through their laws and stuff, Ernest, that the wrapper
part doesn't make the Dow a legal entity.
It creates an entity that surrounds the Dow in the middle, bunch of people voting with
a legal entity around that Dow that acts as the shield.
So it's like a big moat.
And in the middle you have the castle, which is the Dow, but the moat is not the castle.
And that is what I think they mean when they say wrapper.
What do you think?
Yeah, I agree.
That's a fair statement for the, I mean, especially the Tennessee, Wyoming, Vermont, Dalles themselves.
We'll get into the Utah.
The Utah one special.
We'll get into that one.
But yeah, for the Tennessee, Vermont, Wyoming.
I actually just came up with that right as we talked about it.
So the castle is the Dow.
The moat surrounding the castle is the wrapper, which is not the castle.
That's the important distinction to wrap the Dow doesn't mean the Dow is the wrapper.
And that will bear itself out here when we do these next few slides as to why that matters.
And then I started getting into, I didn't fully understand this one, Ernest, maybe you
know about this member managed versus manager managed versus smart contract managed.
We'll take the first two member managed companies versus manager managed companies.
What's your, what's your understanding of that?
I mean, that's just basically you've got your Dow voters where you, that's member managed.
That's less decentralized.
You know, there are different forms of companies, different forms of governments.
We talk about having a direct vote within DOWs and having that direct vote.
Then I would see that as more member managed, whereas manager managed would be where you
vote on certain things that are implemented by individuals within a Dow.
And so there's an element of manager management or centralization, let's call it, within the
Dow structure.
Yeah.
And in one of them, I saw a smart contract managed and this one was a national, national
law review article by Mr. Jason Finger and Mr. Peter Kramer.
And they opined that, I'm trying to blow it up a little bit so that people can see, read
it.
Here it is.
So in this case, the Dow is the member managed unlike the vending machine, which requires
no human involvement or management if operated properly and is so smart contract managed.
This distinction becomes important because traditionally management powers cannot be
legally vested into a non-human protocol like a smart contract because there is no one to
hold accountable in cases of harmful decisions and no one to handle situations not contemplated
by the smart contract.
So here we see the emergence, at least in my view, we see the emergence of a new concept
of the member managed, manager managed, and now possibly because of Dow's and blockchain
technology smart contract managed.
So something to keep an eye on in the future.
So Dow LOCs, basically limited liability companies.
The reason why that was important was because we just went over a few cases where Dow members
were deemed to be in general partnership, meaning unlimited liability between if someone,
one random member decided they want to go take a loan out against the Dow, then that
suddenly somehow had an effect on the rest of them because they're all partners and they're
all unlimited liability to each other.
Whereas here you create an LOC, you suddenly have created a legal vehicle where you only
are limited the liability that you have voluntarily contributed to the company.
And we're putting that in the confines of a Dow.
So let's get into what I've seen to be the biggest one, the DUNA.
This one is Wyoming's take on a Dow LOC and the DUNA stands for Decentralized Unincorporated
Nonprofit Association.
This is probably what I would say is the quintessential, the poster child for wrapping a Dow in the
United States when it comes to just the branding of it.
The DUNA is a legal entity for Web 3 tech governance.
It offers limited liability protection and identity.
Legal standing, meaning when it gets sued and can be named, it can stand for itself.
Legal existence, meaning it doesn't just expire because of, you know, whatever, 10 days have
passed.
Property ownership, it can own property and assets.
It can convert to different types of structures.
It can merge and it can seek profit.
But for DUNAs, they are technically classified as nonprofits.
So to engage in profit making activities is permissible, but those proceeds must go back
into the nonprofit purpose.
So Wyoming's take seems to be, we're going to treat Dow as a nonprofit under the limited
liability company framework.
What do you think, Ernest?
Yeah, that's, I see what they're doing.
It's going to be interesting how the federal government treats these for US federal income
tax purposes.
But yeah, like will it be, are they allowed to have 501c3 status?
Like the whole, yeah.
Yeah, they'll need to have 501c3 status in order to be nonprofit.
And certainly nonprofits can be engaged in profit making activity.
It's just that they're taxed on those as what's called unrelated business taxable income,
UBTI.
Yeah.
I actually didn't, I didn't understand DUNAs to be treated as nonprofits until I started
delving into the specifics of it.
I'm surprised that first of all, Wyoming, you know what I mean?
It's Wyoming.
When do you ever hear Wyoming in the news?
But Wyoming took the stance to say, we want to enshrine this a sort of protection status,
protective status for Dow specifically, Web 3 technology governance.
We're going to give it legal standing, allow them to be in perpetual existence as long
as they pay all the fees, they have all the right people, officers and members and bylaws
and the such, but they're going to be nonprofit and may only be nonprofit if you want them
to be a DUNA.
I still don't know quite what to make of that.
What is it about nonprofits do you think that Wyoming chose to go that route?
Well, Wyoming is looking to be the new Delaware.
I mean, they're just looking for everyone to go and register their nonprofit there in
Wyoming and pay Wyoming taxes and registration fees for registering them.
They've done the same thing for years with license plates.
You see all these buses running around, these private buses that people own, and they've
been registering them in Wyoming and the other states have been arguing that they're improperly
registered and so there's all this tax competition going on with Wyoming because they're just
trying to, I mean, they have to, they don't have a lot of economic activity going on in
Wyoming and so they're just reaching out trying to get some more economic activity and this
is one way of doing it.
One thing that I found at the very last bullet here is the purpose of a DUNA is to protect
and support the underlying blockchain network, but like a town council is not itself a business
and I took this quote from A1Z Crypto.
They did an article on the DUNA and Oasis for the Dow by Miles Jennings and David Kerr.
Apologies if I mispronounced that, but here they have a really nice article, some good
visuals to show where, how Dow's were operating in relation to smart contracts.
But they opined that they related closely to a town council, I'm not exactly sure how
town councils are, or maybe they're unincorporated associations, not sure, their legal status,
but they opined that it's not a business and this is where I started getting tipped off
about the wrapping, the wrapping of a Dow, where it's the moat, which is not the castle,
they're two separate, well in one case one is a legal entity that's protected, the other
one in California state law is apparently a general partnership, it's unlimited liability.
So I'm still trying to wrap my head around it, but what you've commented on so far is
really starting to help.
There's a lot of wrapping going on.
A lot of wrapping.
Boxing.
Go ahead.
So that's the DUNA.
Now let's get into the newer kid on the block, the LLD.
Already that just sounds menacing.
It sounds like there's something I want to know about that.
An LLD stands for a limited liability decentralized autonomous organization.
So it's actually kind of an acronym within an acronym, which is always fun, but an LLD
is Utah's take on Dow LLCs and specifically they decided to go the for-profit round, so
the normal LLC corporation round, but instead of creating the LLC, they decided to kind
of hard fork off of LLC and create LLD.
So under Utah state law, Dow's are designated as a separate legal entity.
And this is the part where I'm getting kind of confused because on the one hand, just
the plain reading of it makes it sound like we're not talking about the moat versus the
castle anymore.
We're talking about the moat and the castle is the same thing under an LLD.
It is, the Dow is the legal entity.
However, when I was reading the actual, what they call the Dow Act, which is what Utah
law passed, one little, little line down, down below was, where to go?
Where to go?
Here.
Shall be deemed a legal entity separate and distinct from the Dow members.
So what I thought was, you know, a Dow was a legal entity, now it kind of looks like
a rap Dow.
I'm not sure.
I don't think so.
I think they're just saying that the Dow itself, I mean, like an LLC is separate and apart
legal entity from its individual members, the LLD will be separate and apart from its
members.
And this is what I was saying before, some of these cases where they're, you know, California,
I say they, we'll just say it California, reaching out and trying to hold people liable
for the actions of a Dow because they're individual members within the Dow.
These entities, these structures are put in place to insulate those members from the liability
for the actions of the, of the, of the Dow itself.
So what then is the significance of wrapping the Dow versus the Dow being the legal entity?
Yeah.
So when you talked about the Tennessee, what was it?
Tennessee, Wyoming, Vermont, DOWs, they're saying that the DOWs themselves are not legal
entities.
And so, but at the same time, when we talk about this, this manager controlled DOWs,
I think, I think we're going to see a little bit more liability in a structure like that
than you see with the LLDs.
And I'm actually putting some, I'm in Utah myself, I'm in near St. George, Utah here
and what they call hurricane, but it's spelled hurricane for everybody else in the world.
But in Utah here, they have these LLDs and I'm actually working on a few right now.
And when you say a little bit more liability, were you referring to the DUNA?
Yeah.
I'm referring to the DUNA having more liability because of the structure, the way that, the
I'm sorry, I was referring to, so these DAL LLCs, when you talked about the Wyoming, Vermont,
Tennessee structures with the wrapper, you know, you had a member management.
Do you see those as limiting liability for the members, sorry, the managers?
Is that what you're saying?
Yeah, I think that is what I'm saying.
Let me process that because I didn't make that connection until right then when you
said that.
So maybe that's the connection was that DUNAs or no, no, LLDs establish a manager controlled
DAL, the right connection or is it a member controlled DAL?
It'd be a member controlled DAL because you have your governance rights in the DAL, but
you don't have, you know, a limitation of liability.
The LLD would be the member controlled DAL?
Yeah.
And so the DAL LLC would be a manager controlled DAL because it's a separate legal entity from
the DAL itself and that DAL LLC requires, I mean, managers is like any other for-profit.
Right.
Because you would need a registered agent, which a DAL LLD requires, but you don't have
shareholder responsibilities.
It's important to note that for the DAL LLD members of a DAL do not have fiduciary duties
to each other.
So that's already, like we're already diverging big time.
What are some other key things I found?
Member in a DAL LLD, so an LLD in Utah, allows a DAL not registered as for-profit entity
or nonprofit entity to be a legal equivalent of a domestic LLC.
So meaning if your DAL isn't already registered as some sort of for-profit or not, not for
profit, you can now register as an LLD and it will be the legal equivalent of a domestic
LLC.
So there it is.
The DAL is now the LLC, the corporation or the company, excuse me, the company.
Member means a person who has governance rights and the DAL and excludes involuntary recipients.
That was a funny thing.
I'm almost copy pasting here.
So if you have a governance token, you are a member of an LLD, of the DAL.
But if you were gifted all these tokens and you didn't ask for it, then you're not automatically
inducted as a member unless you start participating.
It has a little comment at the end that says unless you start participating, then okay,
then you've acceded to the member role.
That was funny.
It makes really interesting.
I feel like they consulted real Web3 people out of this.
They distinguish pretty clearly.
I'm not sure when you get into the smart contracts and how the DAL can be just basically a series
of smart contracts and the decision making can be programmatic.
I've never seen that as spelled out as it is with the LLD Utah State law.
It read really very clearly and it's not a very long read.
We're talking, I think it was like 10 pages maybe.
So they distinguish between on chain and off chain and even majority chain activity.
Majority chain like when you hard fork BSV and BTC, BTC remained the majority chain and
BSV became the minority chain in that instance.
Now they're their own thing, but whatever.
So if a DAL hard forks, how is that treated?
So they would talk about the majority chain, 51% of the governance going toward the majority
chain.
They distinguish between blockchain, transactions, forks, smart contracts, token holders.
They really spell out Web3 framework and then they enshrine that in this thing they call
the LLD.
And it seemed they were thinking about snapshot voting.
You have on chain voting, but you also have snapshot voting.
I think they're really thinking it through.
Yeah.
I was really pretty excited because this was like a common sense approach here.
And later on you'll see just how common sense it really got.
It gets real.
So it requires a registered agent.
It requires bylaws.
So like I said in the very beginning, the foundation company does not require bylaws.
It required a constitution, which is broken down into your memo of association and your
articles of association.
Your bylaws is pretty much your articles of association for foundation company.
It lays out how you will structure and how your company will be run.
So same thing.
You are required to have a legal representative.
And then I just took it straight from, because it appeared later on way, way down below.
It first didn't say you have to have a legal representative, but way down below a DAO shall
retain a legal representative to undertake tasks that cannot be achieved on chain.
And that to me was another example of differentiating on chain, off chain activities.
They really thought this one through in my opinion.
It starts with an organizer.
Your organizer could become many different things like members and whatever afterwards.
But you must start with an organizer to kick things off.
Shall be deemed a legal entity that is separate distinct from the DAO members.
I'm still kind of fuzzy on how that doesn't make it wrapped, but I believe Ernest, when
he says there, there's a difference there.
We talked, he talked a little bit, a little bit earlier about how we might see a little
bit more liability out of the LLCs, which decided to take the member controlled DAO
route rather than with LLDs, which are more member controlled route.
Unless Ernest, you had any more comment there, I'll just leave that one for you.
Manager versus member control.
Yeah.
Later on also says members may only be liable for the on chain contributions that the member
has committed to the DAO.
And there is one of the clenchers when it comes to limiting that liability as a token
holder.
Roxy, you were talking a little bit earlier about how if you buy a token and become a
DAO member, can you be sued?
And you referenced LIDO DAO at the time.
Well, if you were an LLD, you have legal standing in the state of Utah as an LLD, you may only
be liable for the on chain contributions.
So snapshot voting, for instance.
All right.
I'm not speaking out of turn there, Ernest, you would look at...
I mean, I've read that a little bit differently, but I'm going to have to research that one.
Okay.
I'm not a lawyer, so I would look to Ernest to kind of override and maybe pull me back
when I might be interpreting too liberally, let's say.
Okay.
And here's just how real it gets.
Here's the funny part.
If a DAO refuses to comply with an enforcement judgment, meaning LIDO DAO, or not LIDO DAO,
was the first one we had.
It was OKI DAO, where they were required to pay a $643,000 fine by the California judge.
Right?
So if you were an LLD, and if OKI DAO was LLD, right?
And they were required to pay this $643,000 fine, and the DAO decided that it didn't want
to do that.
Right?
If a DAO refuses to comply with enforceable judgment, like OKI DAO, the members who voted
against may be liable for any monetary payments.
Right?
So if you put OKI DAO after that, put up an OKI IP, an improvement proposal, and said,
hey, should we pay this $600,000 fine?
And 51% vote, no, we should not.
And that wins out?
Well then, the 51% becomes liable for the judgment, not the 49% who said, yes, we should.
That's funny.
That's funny to me.
That to me is thinking that through.
Even if you disagree with the way they came out, they thought this one through, in my
opinion.
Yeah, they did.
I've never seen that before.
Well, I mean, an officer in a corporation can be held personally liable for some of
his actions.
I mean, I can understand where they're going there.
And these were saying that the members, those members may be held if they voted to say,
no, we're not going to pay it.
And this to me is the adjudication, is the resolution of the question.
When the DAO disagrees with a court of law, who wins?
Right?
And up until this point, the DAOs have been saying, we're so anonymous, you can't find
us, you can't hold us accountable.
Now, Utah's saying, we will make you a legal entity where you can fight for your rights,
you can own property, you can go for profit.
But you will also be held accountable for when you make poor decisions, saying that
you're not going to comply with the illegal enforceable judgment because you must be held
to account, you must pay taxes, all these sorts of things that Wyoming, Utah, Tennessee,
and what was our other one?
I don't want to leave them out.
Wyoming, Tennessee, Vermont, Utah are trying to enshrine for DAOs.
Yeah, what's going to be interesting with that is, so they say an enforceable judgment,
and there's something called the full faith and credit clause, the US constitution that
requires that official acts and records of one state have legal standing, not standing,
illegally enforceable in the other states.
And so...
And what was that called?
The what?
Full faith and credit clause.
Full faith and credit clause, okay.
Yeah.
And so essentially, if you get a judgment against you in California, you can enforce
it in Utah.
And so it'll be interesting to see with California doing all of its taxation of extra territorial
income.
So if California taxes this extra territorial income, even though it doesn't have a property
there in California, it might be able to reach out and touch the assets of the Dow in Utah
by operation of the full faith and credit clause.
That is interesting.
And that's where that case law is going to come out to play.
Yeah.
That's fascinating.
This is stuff I nerd out on.
So I can understand not everyone might care about this stuff, but this to me is fascinating.
What are the rules?
What are all the things you need to know to play in this arena?
Because whether or not you know it, if you are a sand token holder, you are a Dow member.
Gunta says it all the time.
If you own land or if you own sand, you are part of the Dow.
You are a Dow member.
So what is this arena that we are all engaged in, this big grand experiment?
What are some of the things we need to watch out for?
Well, apparently full faith and credit clause, something I need to go look up now.
Just like I looked at the Long-Armed Statute, the Dodd-Frank Act, all that.
Yeah.
I mean, the full faith and credit clause.
I mean, if you go back to 1950s, yeah, 1950s, full faith and credit clause was used a lot
with arguments for interracial marriages.
So there were states that had laws against interracial marriages.
Virginia was one.
And there were cases on whether they would have to recognize a marriage in another state,
in their state, even though their state had outlawed the interracial marriages.
I didn't know that.
Yeah.
And then it comes up a lot with, and then that argument comes up a lot.
And I studied this on undergrad when I was a youngin, with the full faith and credit
clause applying to same-sex marriages.
And how, if one state recognizes a same-sex marriage, can they go to another state and
seek to be recognized that way?
And the full faith and credit clause is included in the US Constitution.
So yeah, the answer is yes.
Right on.
And I guess the answer would be yes in 1994.
Yeah.
But maybe not quite as seen as to be enforced.
Not until later on when it just became obvious that, yeah, we need to evolve.
We need to evolve a little.
Yeah.
So what I read out of all this was that, while you're not required to have a profit motive,
nor do you have a fiduciary duty, nor are you required to have a board of directors,
nor are you required to have shareholders.
You will ensure that you can be legally represented and called to account as a Dow, and you will
be taxed.
You will share in the common expenses of our nation.
Which leads me to my sponsorship plug.
So decrypted.tax, if you have digital asset exposure and you're living here in the US,
you have US taxes to pay, whether it's in Utah or any other state, give us a call.
That's what we do.
And then as far as legal representative, yeah, I'm in Utah, board legal, and we are working
on setting up some of these DALs for individuals, for businesses, and for groups of individuals.
So yeah, give us a call.
I have decrypted.tax up here on the main screen right now.
Everybody take a look.
I hardly recommend, you know, Ernest has been not only just a voice of reason within the
Apecoin Dow, but also has turned out to be someone who has forced for good many different
things, accounting, capital, just a present voter.
Someone who, if you were an Apecoin Dow, just the other week said, you know, with the new
changes coming to the AIP with revamp, where it kind of changes the way you go about temperature
checks and going to vote, you need now delegations a lot more than you used to.
And Ernest has pledged that if you're having trouble with that sort of thing, getting the
required number of votes, message him.
Ask for his support, and he will support you to the maximum extent that he is able.
But tax season is upon us right now.
If you are a US resident, and again, that long arm statute, US citizens are taxed globally.
Now there are some, as I have lived overseas for more than, I think the number is 300 something
days right now, or if you are overseas for more than X number of days, then you are exempt
from certain tax provisions.
Okay.
But for the vast majority of us, that is not the case.
So you are taxed globally.
If you are a US citizen, please, the US government is getting very smart on digital assets, cryptocurrency,
not just cryptocurrency, but also NFTs, tokens.
And that being said, I do want to emphasize, at Decrypted Tax, we have software on the
backend of our website that tracks these activities, similar to Coinledger or Coinly.
But with our service, what you get is you get individuals that you can call and you
can have a talk with them and understand what's happening with your return.
Everyone's had the experience of importing their data into Coinledger or one of the other
tracking softwares and had 43 missing basis points where they didn't know how much they
paid for a certain crypto.
And therefore, when they sold it, they were going to get taxed on the total amount.
And we've gone all the way back to looking at emails for trade confirmations from clients
that were on exchanges that were closed up by that point and they couldn't get the data.
And everyone has those emails that they always receive.
And a lot of people do what I do.
And that is when I get a trade confirmation, it automatically shoots that over to a folder
and then I never look at it again.
But we've had clients who had those trade confirmations, we were able to use those to
substantiate their basis and their assets and minimize their tax liability that way.
So you have individuals, not just computers, not just smart contracts or whatever written
to to cite for the data, but also I will never charge or defending information that I put
on a tax return for a client.
That is you get audited.
I'm there.
We go to tax court.
I'm still there because when I put something on a tax return or when one of my staff put
them on tax return and I sign it, we're putting it on with the view that if this gets gets
challenged, I'll defend it all the way to tax court if necessary.
And at no charge.
Like I said, force for good.
The last one that we went over that we're going to go over is the Guernsey Purpose Trust.
This one came in the very last minute while I was searching and found out that it was
a DYDX, so DYDX, DAO, which is a which is a decentralized exchange.
They are their DAO is set up under what's called the Guernsey Purpose Trust.
And so a trust like like many people, you know, irrevocable or irrevocable trust.
But Guernsey, I didn't even know was a country is a country off the off the country of of
France in between United Kingdom and France, Exeter, Jersey.
But something that just popped out with another legal structure that you could have as a purpose
trust is contemplated in the context of DAO grants.
It specifically creates additional benefits that may not exist for trust and other jurisdictions
as in flexible trust requirements and favorable rates of taxation.
And assets are transferred from a smart contract to the DAO control to the purpose trust.
So from a smart contract, the DAO controls to the purpose trust and one or more trustees
and enforcer enter into a written agreement, thereby bringing the purpose trust into existence.
So another another legal framework that you could use that one DAO is using the DYDX Foundation.
And you'd really be surprised to how many companies there are in that little island
of Guernsey because they are also a tax haven.
I did not know that.
Yeah.
When I was working in London, there were a lot of investment funds that kept Jersey or
Guernsey entities in between the the the shareholders in the entities, which I was doing it because
there were US shareholders.
And so there's a lot of that a lot of those are set up in Guernsey.
It's a low tax jurisdiction or no tax jurisdiction that makes its money off of registered companies.
Like I said, Wyoming setting up self up to be.
And that's it.
So today we went over part two, which was a Q&A bit of commentary with Ernest Lee, who
is a lawyer out of Utah and also is, as you saw, tax tax attorney, tax accountant, holds
a has a tax accountant practice, is also an attorney, is many things.
We went over case law, what has been decided in court, went over different legal opinions
that still remain to be decided with a comparison of DUNAS, LLDs, LLCs and trusts.
And part three, part four, we will do in the future.
We did have quite a number of community questions.
I already went over them ad hoc.
What had questions from Roxy and from Metastreet Journal.
Thank you both for participating in that and asking those questions of Ernest.
If you have any follow follow up questions for me, my Twitter is ErnestLee.com.
Just look up above me right above above, above Ernest's face and you'll see his Twitter handle
right there.
Yeah.
So shoot me a text or shoot me a message.
I usually respond within 24 hours.
Very rare that I don't.
But yeah, and then you can also go on the website, decrypted.tax and there's a there's
a spot there where you can book a call with me and literally I have time allotted on my
schedule every day for calls like that.
Well, Pax said this is really interesting.
Thank you so much for Pax and good to see you.
I know we talked a couple of times on Twitter.
And open topics, no open topics that we need to go over.
We will rate someone at the end, someone who was in the sandbox category and we already
went over the future episodes.
And last but not least sandbox spaces.
So where is Sansam gathering?
So of course, discord, we have our sandbox game discord and we normally talk on hashtag
Dow discussion channel.
We also have the sandbox down forums as where the majority was gathering discuss on Twitter.
You'll see hashtag Sam fam hashtag the sandbox Dow hashtag sandbox game.
Also you can look at at sandbox down and a rash selective.
Arash selective does some show us what sand to sand to daily does the the daily floor
prices for sandbox land and a rash selective does like a newsletter of sorts for sandbox
has for quite some time on YouTube.
We have the sandbox Dow has the official digging the sand podcast.
Sam Sandow podcast is what you're listening to right now.
It's at lands or YT and Sam fam cafe is kind of like a like a meet and greet place for people
talk to each other.
And on the monthly sandbox spaces and I promise this wasn't really planned to begin with.
But so Bulls on the Block is on Saturdays.
And that is where as I mentioned, Ernest, I think, and I first met many, many moons
ago, I guess last year.
And Ernest is now acquired a Bulls on the Block.
We did originally interview Bulls on the Blog.
I think it was episode eight or nine, Crypto Sheep and Anthony.
And so they were owners at the time.
And now it's Ernest as of a month or two ago.
On Mondays we have Mocha Versailles, which is us.
And Monday through Friday is Coffee with Captain.
On Tuesdays is Nailu Digital with Whale Members.
And we'll just circle around very briefly back to Bulls on the Block.
It is a they cover sandbox, they cover Apecoin Dow.
What else are you covering nowadays, Ernest?
SDKs?
No, we don't cover SDKs.
We're doing other spaces for that.
And Bulls on the Block is, you know, that space is run by the Bulls on the Bull Council,
which is separate and apart from the Bulls on the Block entity itself.
The Bulls on the Block entity is an LLC here in Utah.
The Bulls on the Block Bull Council is an incorporated entity that runs those spaces
there on Saturday mornings.
I highly recommend Bulls on the Block.
They are they've been around for a long time, years.
One of the first mentors, I think, for the Apecoin, or the apes, I mean, excuse me, the
apes, not Apecoin Dow, but actual apes.
So the monkey jpegs.
They've been around for a long time and they are one of not the few, but one of I'd say
the ones I would highlight as true relationship building, true.
You come and you discuss.
It's a great place to learn, to hear different perspectives.
It's very respectful, very civil.
It does sometimes get a little spicy, but it's all within the within the confines of
good taste and just people having differences in opinions.
It's totally fine.
Usually when Derek Smart shows up.
Yeah, yeah.
When Derek shows up.
I can give him a green.
Sometimes when Natalie shows up.
Natalie shows up.
I'm sure he had Natalie's great team.
Great people, great people.
And I would credit Bulls on the Block with one of the large ways that I was able to expand
just out of the sandbox where originally when the sandbox foundation, excuse me, sandbox
Dow was announced on May 28th of last year, most of us, the very first thing we said was
what in the world is a Dow?
And it started us all down this path of trying to become self-aware as a Dow.
What does it mean to run a Dow, to be a part of a Dow?
What is a foundation?
And now here we are, part two.
What is the case law?
How does it affect us?
What sort of comparative structures are there and how are they different from the foundation
company?
And so this episode is largely a result of some things that I was able to explore in
Bulls on the Block.
And this is a great place to be, great place to learn, good friendships and associations
to make.
And also if you have a bull or you have a bear or you have a bull Evo, you have one
vote.
And so it has a Dow as well.
Yep.
So you have your own vote within the Bulls on the Block community and they vote their
community wallet.
And as a disclosure, I am a bull owner and I am a bear holder as well.
So I have seen this firsthand and how they run their snapshot and how that contributes
to their voting power and they're within the Apecoin Dow and elsewhere and also the sandbox.
So because they have us as I mentioned with Bulls on the Block episode, they have a six
by six.
So a plot of land as this earnest, by the way, by himself.
I've got a six by six that I'm going to put little spots for each one of my businesses
in there.
I think I have enough room.
You probably do.
Thirty six plots.
Yeah.
Should be okay for now.
For now.
We're growing.
And that will conclude episode 57.
I had six jobs or I had five jobs and I like, wait a second.
I counted six.
I'm like, okay.
Yeah.
Six.
Yeah.
So there you go.
You have way, way too many hats.
I still don't know how you do it.
All these different companies.
And I know you always tell me you have great people, good team.
It's all about having good people.
You get people the tools to do what they do best and you get out of their way and let
them do it.
Yeah.
Right on.
So I have one on, on the sandbox.
And there is one person that I will rate that, that I'm good terms, good friendly terms with
talk to me goose.
Great person that I have seen around the, the world of things community and talk to
a goose.
There we go.
Okay.
Great.
Has started.
This was Sandow podcast 57 part two with earnest.
We went over case law, went over the Dow comparative structures of different legal entities that
are out there.
We went over over our overarching self-awareness, what it means to be a Dow and earnest.
Thank you for your time.
Thank you for being here.
Anytime.
All right, everybody have a great day.
Peace.
Okay.
I
hit.