DAOs vs Investment Funds | What's The Difference?

Welcome back to the channel. My name is Bridger Pennington. Today we're going to talk about DAOs versus funds. And what DAOs are is a decentralized autonomous organization. We're talking about what a DAO is, how they're put together, and actually how DAOs are starting to become a new medium, just like a fund is, to raise capital and deploy capital in certain assets. We're going to talk about the pros and cons of DAOs, ways that DAOs are fraudulent, and a couple of them that have blown up in people's faces, been very bad. And also, if you're going to start a DAO, a few points to look at to make sure you're compliant. Client with the SEC. So with that, welcome back to the channel. On this channel, we talk all things funds and finance. Now, DAOs became very popular in mid-2021 where they were promising huge returns to investors. You can invest in a DAO and earn 4,000%, 5,000%, even 10,000% APY. This obviously attracted a lot of moonshot investors who could stake and earn these types of returns. Some of the biggest DAOs in the space are Uniswap, Ave, Curve, Maker, and many more. However, there are other DAOs that are getting put together to go buy casinos, golf courses. Right now there's a DAO going out to try and purchase the Denver Broncos. So let's take a look under the hood and see how these work and potentially how you could maybe use a DAO inside of your business. Now, in basic terms, a DAO right here signalized is a DAO that issues tokens. Members can buy that token. Money goes into what's called the treasury, and this is all controlled by a smart contract. And they'll list this DAO whatever blockchain they decide to use. But that smart contract decides exactly how every piece of the DAO will work. Now, most DAOs have some type of promise or thesis of what they're going to do that's written into smart contracts, how they're going to use this DAO's money. Some DAOs go out and hold other cryptocurrencies. So they have this, this pie gets split up. Some of them go buy certain things. Like I mentioned before, a few of these DAOs said our treasury will go and buy a golf course or our treasury will go buy the Denver Broncos. All right. And they're going to— everyone pools money together. Essentially, you will own— that's the promise, at least— that you will own fractional ownership if they purchased it of the Denver Broncos, which is kind of cool right now. Oftentimes this treasury needs liquidity. It needs to provide liquidity to token holders that want to buy, sell, trade. And so they will allow other token holders to stake tokens, meaning the treasury holds their tokens for 60, 90, 180 days, whatever the day amount is, and they will pay you tokens as a reward for giving them liquidity inside of their DAO. Now, if you look at what we teach on this channel, this is a very similar structure to what a fund kind of looks like. If you— maybe we tag some other videos right here. When we talk about a fund, all a fund is is a pool of money. Investors put money in that. That pool of money can be governed by a manager or whoever to go make investments. Now, the difference with the DAO is it's all run through a blockchain and smart contracts, but it still holds very big risks of fraud and other details which we should get into right Now, a recent scam/fraud that we've seen in this type of DAOs is that a lot of DAOs were set up with smart contracts that state every token has one vote on what we do and whether we're going to buy the Broncos or not. Everyone will vote on it or everyone will vote on which golf course to buy. However, a few smart individuals have come into DAOs and done aggressive takeovers. So we've seen a few DAOs where a big bag holder, a whale, will come in and buy up 51% of the entire DAO, giving them the majority vote on any decision or the veto power. If they don't want to buy the Broncos or whatever, they don't want to buy golf courses, fine, they can veto that decision because every token holds one vote. Additionally, they can move that same treasury into tokens or projects or cryptocurrencies that benefit them personally. Kind of interesting, right? All right, we're getting a little messy here. I gotta redraw my little circle here. All right, here we go. We got our new picture out here. Now, many DAOs have become very creative, and I saw one DAO that actually mixed in what looked like a very simple venture capital type of play. What the DAO said was, buy our token, we'll move money to the treasury. We have a board of 10 people. Those 10 people will govern and decide how we're going to invest the treasury. We're going to invest the treasury into startup companies. As those companies make money, the money will flow back to the treasury, making the treasury have a bigger price, giving the token a larger floor price, essentially making the stock of this DAO go up. Kind of a cool idea, right? However, that particular one, I'm not gonna say their name, crashed and burned 2 months in with their token dropping over 70% in value. Now let's talk a little bit further about the SEC, the Securities and Exchange Commission, the big dogs, the big kahunas in the United States that make all the laws around doing stuff like this and are the first ones to the line that are going to sue you, take you to jail, whatever it is, if you do something wrong. And actually that's why this channel even exists. We share a lot of details and content on how to properly structure your fund or structure your investments. So let's talk about DAOs with the SEC. Now, the first thing I got to say is when people talk about crypto, for whatever reason, they just throw all laws to the wind. Apparently, it seems like a lot of these DAO owners or other cryptocurrencies just say, hey, it's crypto. This SEC doesn't exist. Fraud doesn't exist. We can do whatever we want. We can rug pull, we can commit fraud, we can steal capital, and who cares? Well, the truth of the matter is the SEC cares. A lot of people care. And just because it's a different title, crypto, or a DAO doesn't mean you don't have the same laws you had before. Now, one of the biggest things the SEC gets mad at is if you're soliciting securities, especially to non-accredited investors. Now, a non-accredited investor is anyone who is not an accredited investor, which an accredited investor has a million-dollar net worth, makes $200,000 a year by themselves, or $300,000 a year with a spouse, excluding their primary residence. And there's a few other details you can qualify there. So the non-accredited people are the people that don't qualify for that. These are the regular Joe types of people. Now, the SEC hates more than anything when a slick-talking DAO creator or fund manager comes in, solicits securities, and sells to non-accredited investors and then steals that non-accredited investor's money, or they lose their money in that investment. They heavily, heavily scrutinize this category, which is primarily where DAOs play into. The second piece of the questions when you're thinking about setting up a DAO is, am I selling a security? Now, the definition of securities, if you talk to any lawyer and you really get deep, I mean, it is pretty vague and it's hard to determine what a security is and what a security is not. Right now, the Ripple XRP case with the SEC is over this definition. For years, they've been fighting over the definition of a security. So the jury is still out on these types of offerings from DAOs. Now, I'm the type of person that likes to play it safe, especially when dealing with the SEC. So I want to make sure that I'm playing at least by all the rules that they've given me. Now, one of the main guidances the SEC has given for DAOs is that you need to have KYC and AML checks on all holders Of your DAO or security inside the crypto space. Now, what KYC stands for is know your customer. They want money managers to understand and know who they're dealing with, whether they're dealing with the mafia, a politically exposed person, or just a regular clean person, right? The SEC wants you as the asset money manager to know: Are you dealing with the mafia, someone on the FBI top ten list, or someone that's maybe they're clean and they're fine? They want you to know that and report that. The second piece of it is AML, which plays right into the same things. This is anti. Anti-money laundering. They want you to do some degree of check to make sure that you're not money laundering through your DAO or syndication or fund. Now, these two checks can be done by third parties. However, it's a little hard when you launch a DAO with potentially millions of users to do an AML KYC check on every single person that buys your token. These rules, by the way, are the reason when you set up a Crypto.com account or a Coinbase account, they ask you for your driver's license, for a lot of personal details. The reason for that is because they have to qualify and do KYC and AML checks. And the guidance given by the SEC states that if you're doing one of these DAOs, they would like you to do KYC and AML checks. Now, I think DAOs will absolutely revolutionize the way money is raised and moved around the world.

Now, people are asking me, Bridger, does this compete with funds or how is it— is that going to die or whatever?

The answer is no. The principles of raising capital and raising a fund are all the same, whether it's a DAO, a fund, a syndication. The principles are all the same. And most likely, if DAOs become more mainstream, a lot of the same rules that are on funds will affect DAOs. Now, the second question I get, Bridger, should I do a DAO right now?

I was considering doing a fund. Maybe I'll run a DAO and maybe we can raise capital and go buy our properties or invest in whatever we're going to do through a DAO.

What I say to that person is this: if that directly benefits your capital raise or what you're doing and you have a great marketing and engineering team behind it, then by all means, go ahead and try out a DAO. Go do more research, make sure it's all checked out. That would be awesome. However, The total market cap of cryptocurrencies is half the size of Apple stock. Okay, like it is so small right now. If you're going out to raise capital and you maybe you don't have a great marketing strategy or a great engineering team behind your DAO and your plan is to go, you're going to do a real estate deal and you're going to go pitch some big investors to come into your real estate deal. It's hard enough to go pitch these big, you know, family offices, institutions, hey, come into my real estate deal. We're going to do this big real estate deal. But on top of that, you're going to say, hey, we're doing a big real estate deal. You got to trust me to invest. But also you've got to trust this DAO and this new world of cryptocurrencies to invest through the DAO into my real estate. It gives these longtime investors that maybe aren't used to crypto another degree of risk. First, they got to trust you. Next, they got to trust your deal and the setup of the deal. But now third, on top of that, if that wasn't enough, I've got to trust putting money into a wallet and moving it over to this brand new DAO that maybe is going to rug pull. It may not benefit you to do a DAO versus a traditional vanilla fund or syndication that everybody already knows. They trust the structure because it's hard enough to get them to trust you and trust the deal. That's my thoughts on DAOs. Drop a comment below. I'd love to hear you guys' thoughts. Let me know what you think. Peace.