Fintech

The DAO is the new investment club

The DAO structure popularized in crypto projects is getting adopted by investment clubs looking to invest in digital assets.

Silk Road NFT.

Silk Road is a limited edition series of WebGL artworks created by Ezra Miller. The NFT is held by people who are part of the Friends With Benefits DAO through tech startup Prysm.

Image: Ezra Miller

DAOs sprang up as a way to oversee crypto projects. Now retail investors are adopting the decentralized governance structure to band together in investment clubs. Often the purpose is to buy crypto. Collectively, the informal groups getting set up could vie with venture capital firms seeking to profit off of digital assets.

A number of companies have sprung up to help small groups of friends or associates use a DAO to manage investment clubs to invest in crypto, NFTs or other Web3 assets. While DAOs promise to streamline some aspects of governance, there are still a number of technical aspects to consider such as managing governance, voting, treasury and custody of assets. And it could be a big opportunity if crypto continues to boom.

Some believe this new approach to crypto investing could have a broader impact on the crypto and Web3 startup investing landscape, just as smaller investors have become more common in equity startup investing through AngelList and other investing sites.

DAO in a box

Companies such as Syndicate, Prysm and Upstream offer ways for the groups to purchase crypto assets. Some startups offer tools for specific tasks such as voting, while others like Upstream offer the entire “DAO in a box.” Some such as Syndicate and Prysm focus on helping groups that want to buy crypto assets.

“We think of it as a no-code, full-stack DAO-in-a-box where you can spin it up really easily and manage it all in one place,” said Alex Taub, co-founder of Upstream. “And you don't need to use five different tools to do the things that you need to do to run it.” His company doesn’t focus specifically on investing DAOs, but he’s seen several groups successfully use its DAO tools for the purpose.

“What we've started to see and our own personal hypothesis is that this is as disruptive to venture investing as YouTube was to the film and television industries,” said Will Papper, co-founder at Syndicate. “People are setting up investment clubs for all sorts of things that they never would have set up a venture fund for and some groups are setting them up for things that are pretty similar to what they’d use a venture fund for. So the transformative nature of this has been really incredible.”

The rapid growth in these investing DAOs, enabling more small investors to invest, is made possible by their low cost and easy set-up. “People are buying NFTs together that they never would have set up before because in some cases the cost of setting up a fund would have been a sizable percentage of the total amount that they're raising,” Papper said. “It's broadened participation in a very significant way.”

Watching for regulators

The challenge: Regulators want to rein in crypto and there are gray areas that have yet to be resolved about the legal status of DAOs and how they can invest.

Investment clubs have been around for years for buying stocks and other assets. They do not come under SEC regulation, as long as there is not an “investment contract,” which is defined as happening when someone invests and expects to make a profit from the “efforts of others.”

In order to not be SEC-regulated, investment clubs must have no more than 100 members; all members must vote on each investment; and everyone must be part of decision-making.

This is typically how clubs that run on sites like Syndicate operate. “That means they're not a fund. They don't need to register with the SEC. They don't have the filing requirements, they're just not funds according to the SEC,” said Ian Lee, co-founder of Syndicate.

DAOs, which are still broadly defined, can be used for a variety of investing approaches. Some are more traditional and attached to legal structures such as LLCs, while others do not yet have an equivalent legal structure. Wyoming became the first state to recognize DAOs as a legal entity on their own last year.

Joining the club

The DAO creation business has seen startups tackle the opportunity with several different approaches.

Syndicate focuses on investment clubs, with 1,100 started since it launched in January. It helps people turn a crypto wallet into a DAO for a group of people to invest. Its software also helps manage investments and members.

“We've effectively modernized [investment clubs] for the internet and Web3, enabling people to start these investment clubs natively on the internet to invest in internet-native assets, like tokens, and even off-chain things like startups,” Lee said.

The assets of the DAOs on Syndicate are secured by whatever Ethereum or multisignature wallet the DAO wants. Pre-crypto, these clubs used shared bank accounts — which are also an option with Syndicate. Syndicate connects to fintech Doola for DAOs set up as an LLC if they need to, say, invest in startup equity, open a bank account or do compliance or tax filings.

While it has so far focused on investment clubs, Syndicate also allows people to invest in other assets such as startup equity, as well as property and art — one group even wanted to buy a Porsche. In mid-2021, City DAO, which has bought land in Wyoming, used Syndicate to do its legal incorporation.

The art of the DAO

Prysm, which launched in January, helps groups of friends buy NFTs. The idea is to make it more affordable for individuals to buy high-priced NFTs by pooling their capital with friends or groups.

“Things like Bored Apes, Doodles — the average person is really priced out of that even as an investment opportunity. So we allow for groups to come together to pull together capital in this DAO structure to buy them.” said Thomas Scaria, co-founder and CEO at Prysm.

Prysm tracks deposits and withdrawals of capital into the wallet to track how much each member owns or has rights to. Members can also deposit NFTs that can count as contributed capital in lieu of cash or crypto.

People can use Prysm to propose that a group purchase or sell an NFT. The company also plans to add mass payouts, so if an NFT is sold, funds could be distributed to the group. Prysm doesn't currently charge a fee for its service.

Prysm typically sees two types of users: One is people pooling money together to buy NFTs as an investment. Another is cultural groups that use Prysm to buy NFTs to support artists or cultural ideas. For example, Friends with Benefits, the popular social DAO, has a subgroup of individuals that is using Prysm to buy NFTs. The full Friends with Benefits DAO itself hasn’t bought NFTs with Prysm yet.

The group purchasing of NFTs can be different from those buying other crypto assets because it can be as much about culture as investing, Scaria said. “They're an offshoot or continuation of the trends that we saw with retail investors, like flipping sneakers on StockX,” Scaria said. “A lot of Gen Zers and millennials are, for instance, looking at sustainable investing. They don't really just care purely about financial returns. It's more about: How can you shape the world in a way that you actually want to live in [it].”

NFTs are generally not securities and the clubs that run on its service are not considered subject to SEC registration, Scaria said.

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