What Is a Partnership and Why Isn't My DAO One? | Rebecca Matsumura - Fenwick & West

[Music] awesome huge thanks to our last speakers uh for anybody in the audience that's thinking about starting your own blockchain startup or your own Dow definitely be sure to listen up to this next talk because we've got Rebecca from Fenwick and West talking about what is a partnership and is it why isn't my da one please give a round of applause thanks everybody for coming out on a Friday no afternoon to listen to a lawyer talk and welcome from the past everybody who's uh watching this later on on X uh so um my name is Rebecca matsumura I'm an associate attorney at Fenwick and West work exclusively in the crypto space helping crypto companies with everything from token launches all the way through you know getting in trouble or almost getting in trouble with the government or with each other um so really happy to be here today and to talk through this very important topic for all of us who um participate in Dow governance got to give a standard disclaimer um I am a lawyer I am not your lawyer this is not legal advice you should get your own lawyer if anything that I say today concerns you and I also have to give a special shout out to my colleague Matthew Diamond who help put together today's slides so first and I promise this is the last time that you will see a lot of text on the screen and the only real legal ease that I'm going to use is in the next couple of minutes but what is a partnership legally a partnership is two or more people carrying on a business for profit and sometimes not for profit too an important thing to keep in mind about the types of legal risks that I'm talking about today is that these are creatures of state law they're not federal law this has nothing to do with whether or not a token is in security or any of the other things that we sometimes talk about or hope that the Trump Administration will fix uh there's not a lot that the Trump Administration or anybody in the federal government can do to kind of affect the risks I'm talking about here which would you know which arise under each State's law and would require a state-by-state approach to change so a partnership is the default treatment for any kind of activity coordinated by human beings that meets basically these two prongs again because it's state law it may vary a little bit depending on what state you're on but this is going to be the default treatment here and that's the point that I want you to take away from this right is that if you take no action and you're carrying on a business and you're two or more people you might be a partnership and for the reasons that I'm going to discuss in a minute it's not something that you want to stumble into an accident because it is really important legal consequences so what are those legal consequences this is the part where I scare everybody so the biggest risk of being treated as a general partnership is that under state law you can arise you can have what's called Joint and several liability promise is last time I'm using legally joint and several liability means that in a general partnership each partner can be liable for the full amount of any liabilities created by any other partner in pursuit of the partnership so what does that mean maybe kind of a regular you know non- crypto example first and then I'll bring it back home so let's say Alice and Bob have a general partnership where they run a bingo parlor and Bob forgets to mop the floors and somebody slips and falls and they sue the partnership to get you know their you know their medical expenses pain and suffering you know they were very embarrassed all those things Americans love to sue Bob may not care right maybe Bob lost all his money in meme coins and he's like come after me I'm what they call judgement proof but poor Alice could lose all of her eth right because even though she's not the one who didn't leave who didn't mop the floors every partner is going to be liable for every other partner's liabilities and it gets worse guys it's not just liability for the partnership's liabilities but because the partnership doesn't have its own segregated assets they can go after alysis personal assets right she could lose her house she could lose all of her eats she could lose kind of her own personal um income if you know the damage was that severe you you might see something like this in a crypto context you know for example if there are people who hold keys to a multisig that has Assets in it right and say there's just multiple people uncoordinated no legal entities involved they're all holding the multisig multisig gets hacked multisig gets drained right someone who lost money in that hack could come after the partnership or they could just pick the richest part person who held the multisig and go after them for the full measure of their damages right um so this can be very scary there are are also tax consequences that arise from um Partnerships which I I won't get into in too much detail other than to say if you accidentally find yourself in a general partnership that makes money uh you should definitely make sure you have a good accountant because it's going to get messy one more scary slide these are not theoretical risks there have already been a couple of courts that have considered these issues of whether Dows could be treated as general Partnerships under state law and in both cases where this has been considered the court said yep beta general partnership so this is was the issue this was the kind of legal issue in the case uh that recently came down regarding Lio da which you may have heard about it's also the same issue that arose in the Uki da case right where the cftc sued Uki da is a general partnership and in both of those cases the courts applying California law held that all of the members of the Dow who participated in governance could be considered Partners in a general partnership so in the Uki da case nobody showed up to defend the da so the cftc got what's called a default judgment which is where nobody comes to court to defend and they got a default judgment in the amount of about $600,000 as of yet we don't know of any efforts by the government to collect that money but in theory they could go after any governance token holder in idow to get the full amount of the $600,000 and then it would be up to that person who paid the judgment to then go after the other partners to try to get repaid this is not a situation that you want to be in all right now that everybody's good and scared let's talk about what we can do to address these risks so the risk of joint and several liability and of being treated as a general partnership is fundamentally the reason why kind of normal corporations and normal organizations running businesses incorporate right this is why we have llc's this is why we have corporations this is why we have llps this was like one of the fundamental reasons why this legal structure was developed was to provide an entity that could hold its own assets so that if someone gets injured in the business they the in person who's hurt goes after the assets of that business and not of every individual partner in their personal capacity now for those of you participate in Dows know that that's not a good solution for Dows right um we can't just incorporate the Dow necessarily we can't just set up you know set up a legal entity that is the Dow but that but the first kind of solution that I'll offer you guys that a lot of folks use in this area is what we call a dow rapper and it's an the idea is to be an analog to that incorporation right so many of participate may may hear about having a foundation right whether it's a Cayman Foundation or a Duna out of Wyoming once one of those gets set up or you know from some other um overseas uh jurisdiction and folks often wonder like what is the point of this what is the foundation doing right and one of the purposes that a foundation might have depending on the way it's set up is it might provide a liability Shield right so that it could step up in court if the Dow gets sued and say you know no like I it's not a general partnership I'm the foundation I'm responsible for all of liability ities the sir's never been tested in court so we don't know that it will necessarily hold up but that's kind of one of the the strategies here another strategy um that we use to protect people who are participating in governance or holding multi multi keys or doing other types of activities that could result in Partnership liability is what we call the Reba uh it's the product that Fenwick offers that provides insurance for token holders um you can read more about them when we set up for arbitrum Dow um and you know in that cas you know the policy covers anybody who participates in in in governance who votes their tokens who takes those actions to the extent they're liable for that um so then if somebody goes after you as the representative of the Dow as a general partnership you at least have some insurance that can help you hire a lawyer or pay the pay the damages and kind of get some coverage on that end the final thought I want to leave folks with though is that you know all of these are imperfect Solutions and the kind of legal structuring and the way courts are going to treat this as being worked out in real time um but another thing you might think about if you're someone who has significant risk in this area is how are you arranging your own assets right do you keep everything in the same bank accounts do you have some trusts that handle things do you have your own kind of entity that can do some of this business um obviously you want to get legal counsel involved but if you have significant kind of exposure here you want to also think about how even if I get sued as a general partner it's not me they're suing but maybe it's my LLC and they're limited to the recovery to the assets that are in that LLC right right um thank you guys again so much for coming here today and hearing about these legal topics my final slide has um some Twitter accounts where you can find me um I'll be around after this um and it was really lovely to speak with everybody today and learn about the kind of risks and ways to mitigate a partnership risk for DS thank you