Prop 25 Update and Compliance Game Plan


The purpose of this post is to provide an update on the extensive tax and compliance planning work that has been done on behalf of Builder DAO (in accordance with Prop 25), and to outline recommended next steps and DAO approvals to finalize the DAO’s administrative operations over the next few weeks.

Once this foundation is established, not only will Builder be able to: 1) attract a broader membership with its legitimacy, and 2) provide an example for other Nounish DAOs and share educational materials and tooling with those who desire it, but compliance discussions can make way for the DAO to focus more on its core mission of building to proliferate Nounish DAOs and the Builder Protocol.

As a recap:

  • Builder DAO’s launch and activities are demonstrative of US nexus and thus the DAO is subject to US regulations, including tax laws.

  • To address DAO member liability risk while preserving member anonymity, and to achieve other priorities (described in detail here), the DAO was formed as an unincorporated nonprofit association (“UNA”). The UNA is managed by all DAO members and the DAO’s governance protocol. See Prop 2 for additional details.

  • Under Prop 25, the DAO granted David Kerr, Kyler Wandler, and Zora limited administrative authorization to research and recommend legal and tax service providers to address the DAO’s compliance needs, and to enact necessary steps to formalize the UNA.

What has been done

Since receiving authority, the authorized administrators have:

  • Analyzed the legal, tax, and accounting needs of the DAO in depth;
  • Spoken with various lawyers, bookkeepers, and accountants about potentially engaging the DAO;
  • Vetted service providers to help the DAO comply with its tax information collection and reporting obligations;
  • Designed a tax-efficient procedure for Zora to transfer technical control of the Builder Protocol smart contracts to the DAO;
  • Spoken with a number of banks regarding directly banking DAOs/UNAs, and
  • Provided regular updates on these efforts in recorded weekly town halls and other Discord posts.

Next Steps

1. Approve key service provider engagements

Despite the relative novelty of DAOs and the current antagonistic web3 macro environment, the administrators have lined up top tier service providers willing to work with Builder DAO. This is a testament to the DAO’s mission and the quality of its membership. However, the administrators can only recommend – it is up to the DAO to make actual strategic and managerial decisions.

  • Process - Over the next 2-3 weeks, administrators will publish a series of proposals seeking approval of each of the service providers, and will provide additional context for how each provider ought to be engaged.

  • Payment – As the providers currently do not accept ETH, and discussions with banks to obtain a bank account, while promising, are not yet finalized, the administrators will propose paying the providers in USD and receiving ETH from the DAO as reimbursement.

A summary of each of the providers and their purpose is outlined below, with additional details to be provided in each provider’s respective approval proposal:

Legal – Cooley LLP

Cooley LLP is a top global law firm with substantial experience in the crypto space, including advising numerous DAOs. Attorneys are typically engaged on a retainer basis. And bill by the hour. The proposal will outline how to utilize an on-call attorney responsibly and efficiently to ensure long term coverage. Although we should utilize the Cooley team to educate the community and advise on policy, a framework for streamlining requests and making sure we are receiving maximum value when using their time will be important for overall budget considerations.

Tax Advisor –Deloitte

Deloitte has been providing tax advice to crypto clients since the early days of the industry and has unique expertise regarding how IRS rules apply to DAOs. Zora has engaged Deloitte for the purposes of coordinating tax issues for Zora in relation to Builder DAO, including how to structure the transfer of Builder Protocol smart contract control from Zora to Builder DAO.

While the DAO could utilize run-of-the mill advisors for its filings, engaging top tier tax advisors like Deloitte will provide Builder DAO the assurances that it identified any applicable favorable treatment (e.g. for the IP transfer and maximizing business expense deductions) while meeting its tax compliance obligations.

Information CollectionS&P Global

As detailed in the Taxes and Information Collection guidance previously shared with the DAO, Builder DAO is required to collect certain information from parties it pays for services (which generally captures anyone receiving funds from the Treasury) so that it can fulfill its reporting obligations to the IRS.

We have identified a third-party vendor, S&P Global, that can streamline this information collection process, providing a simple interface to enter information via a link rather than requiring proposal winners to manually complete and email IRS forms.

The information itself is stored and secured by S&P, and the workflow can likely be designed so that no member of the DAO has access to the provided information (discussions are ongoing).

Bookkeeper – TBD

We reached out to a number of bookkeeping services and the quotes for services have exceeded the nature of the work. However, we are in discussions with a crypto native bookkeeper who not only will be able to assist at a reasonable price, but can potentially help develop a tool to remove this expense for many other Nounish DAOs and generate financial statements based off of the uniform nature of projects utilizing the Nouns Builder tool

2. Approve receipt of Builder Protocol smart contract control from Zora

Zora relinquished material control of the Builder Protocol to Builder DAO when the DAO was launched on November 15, 2022, and it would like to finalize transferring complete control of the Protocol by assigning control of the Builder Protocol smart contracts to the DAO. Zora believes that the full potential of the Protocol can only be realized when it is fully in control of the Builder community. The DAO must accept control of the contracts via Proposal vote.

Zora has worked with Deloitte to structure the transaction to mitigate potential negative tax impact of the transfer on the DAO with offsets/deductions. By engaging with Deloitte, the DAO can receive more direct guidance on how to apply favorable tax treatment to the transfer.

3. Approve conversion of a % of the Treasury to USDC as a tax payment reserve

Currently, tax payment must be made in USD. Since the launch of the DAO and receipt of seed funds from Nouns, the price of ETH has moved favorably. However, to protect against potential volatility risk and to ensure we have sufficient funds on-hand to pay the DAO’s tax bill (whatever that may be), some minority percent of the DAO Treasury should be converted into USDC. Once the DAO obtains a bank account, the DAO can then convert the USDC to USD to make the payment when required.

Proposals addressing these action items will be published in the coming weeks. In the meantime, please feel free to share your questions below.

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