The Contractarian Joint Venture

Authors

Carla L. Reyes, Southern Methodist University, Dedman School of LawFollow
Christine Hurt, Southern Methodist University, Dedman School of LawFollow

ORCID (Links to author’s additional scholarship at ORCID.org)

Carla L. Reyes: https://orcid.org/0000-0002-2448-8309

Christine Hurt: https://orcid.org/0000-0003-2926-8564

Abstract

In 2015, a group of entrepreneurs pooled their money together for the purpose of investing in other businesses. The entrepreneurs could have undertaken this activity through a traditional venture capital firm, but they wanted to cut out the middle-man, reduce fees, and retain more control over their capital, so they chose to undertake their investing on their own. The group of entrepreneurs chose not to form an entity. Instead, they attempted to limit their business and liability risk by conducting their activity entirely via software. Unfortunately, the software contained a bug, and an insider siphoned off millions of dollars belonging to the fund. When affected investors started wondering who they could sue, some pointed out that by choosing not to form an entity, the would-be venture capital fund probably defaulted to a general partnership. Meanwhile, the U.S. Securities Exchange Commission opined that the investment tool the entrepreneurs used to contribute funds to the venture via software were probably investment contracts and subject to securities laws.

The entrepreneurs called the venture capital fund “The DAO” because they intended it to be a model for decentralized autonomous organizations (DAOs) that others would later create. Although it spectacularly imploded before it could ever make a single investment, The DAO does stand as a model of the liability and regulatory risks faced by nearly every DAO since: how to form an entity that limits personal owner liability but avoids triggering securities regulation. In an attempt to avoid classification of DAO-related tokens as a security and triggering the costly securities regulation regime, many DAOs end up creating general partnerships. The general partnership—the most ancient form of business entity—features several traps for the unwary: unintentional formation, personal liability for owners, and default fiduciary duty standards. Because of the liability risks posed by these partnership features, general partnership law generally adheres to a key premise: with this magnitude of risks looming, trust is paramount, and a person gets to choose their partners.

Occasionally, however, courts see disputes in scenarios that look a lot like a partnership and analogize to partnership law. Two emerging areas of business have recently ignited a debate as to when contracting parties act sufficiently like partners to analogize to partnership law, and whether, indeed, analogy is ever warranted at all: joint ventures and DAOs. This Article is the first to connect the two discussions, arguing that recent legal developments in Delaware joint venture law provides a new risk mitigation tool for DAOs facing liability and regulatory uncertainty. Specifically, this Article uncovers recent case law that enables the development of purely common law of contract joint venture entities. Such contractarian joint ventures, beholden to no state entity statute, can create a separate governance regime without statutorily imposed limitations.

Ultimately, this Article argues that under certain circumstances recognizing a purely contractarian joint venture may better uphold the policy aims that underly business entity statutes than general partnership law. Indeed, this Article aims to open a dialogue as to whether a purely contractarian joint venture might advance other important policy objectives as well. In particular, using open-source software development communities in the cryptocurrency space as a case study, this Article uncovers the far reaching and important impacts that recognition of a purely contractual joint venture could have for technology policy and innovation, suggests areas for legal reform, and unveils a new tool for the business lawyer toolbox.

Publication Title

Alabama Law Review

Document Type

Article

Keywords

Cryptocurrency, Blockchain, Digital asset, Digital token, Decentralized autonomous organizations, Partnership, Joint venture, Securities regulation, Corporate transparency act, Commodities regulation

Recommended Citation

Carla L. Reyes & Christine Hurt, The Contractarian Joint Venture, 76 Ala. L. Rev. 741 (2025)