Would You Like To Buy A Rare Copy Of The U.S. Constitution?
Would You Like To Buy A Rare Copy Of The U.S. Constitution?
Then consider joining the merry band of cryptocurrency investors behind Constitution DAO.
Welcome to Original Jurisdiction, the latest legal publication by me, David Lat. You can learn more about Original Jurisdiction by reading its About page, you can reach me by email at davidlat@substack.com, and you can subscribe by clicking on the button below.
Are you stumped about what to buy as a holiday gift for your favorite lawyer or law student? I have an idea: the Constitution!1
Tomorrow at 6:30 p.m., Sotheby’s will auction off “an exceptionally rare and extraordinarily historic first printing of the United States Constitution.” It’s one of just 13 copies from an original printing of 500, issued for submission to the Continental Congress and for use of the delegates to the Constitutional Convention, and Sotheby’s estimates it will sell for between $15 million and $20 million.
And guess what? You could be the buyer!
Well, not all by yourself. But if you own some ethereum and join forces with the unknown number of cryptocurrency investors who are part of the Constitution DAO, you might actually have a shot.
What exactly is a DAO, or Decentralized Autonomous Organization? I called up Aaron Wright, Clinical Professor of Law at Cardozo Law School and Director of the Cardozo Blockchain Project, and asked him to walk me through it. Here’s what he said:
A good way of thinking of a DAO is that it's like a message board or subreddit with a bank account. The internet has allowed individuals with shared passions or interests to meet and get to know each other online, but these connections didn't always go anywhere. The idea of a DAO is to add a shared bank account to the mix, allowing these individuals to take some kind of collective action and put the funds to good use.
Here’s another helpful explainer, from Abram Brown of Forbes:
A DAO (pronounced “dow” like the stock exchange) records its membership on the digital ledger system known as the blockchain, and those members do things like vote to govern the group’s decisions. They meet not in person but through chat apps like Discord and other messaging platforms. Joining one often requires a monetary buy in: To do so, you use cryptocurrencies to buy blockchain-based assets called tokens, digital chits that entitle their owners to voting power within the group. The more tokens you own, the more voting power you have.
In Constitution DAO, one Ether (roughly $4,600) buys 1 million tokens. Constitution DAO calls its tokens “People,” just as we refer to the legal tender in America as “dollars.”
In many ways, a DAO is a super-charged mix of the elements that have recently interwoven finance and the internet: A previously unknown group of young people are today able to raise millions of dollars overnight, a task that would’ve once fallen to pedigreed financiers embarking on a multi-week, if not multi-month, sales trip.
Raising millions of dollars overnight is no exaggeration. When I went to bed last night, Constitution DAO had raised $6 million. As of this writing, it has raised $25.2 million—which means that it might have a fighting chance against the billionaires who are its likely competitors for ownership of this object.2
Actually, in the context of Constitution DAO, “ownership” might not be the right word. From its website:
Am I receiving ownership of the Constitution in exchange for my donation?
No. You are receiving a governance token, not fractionalized ownership. Governance includes the ability to advise on (for illustrative purposes) where the Constitution should be displayed, how it should be exhibited, and the mission and values of ConstitutionDAO. ConstitutionDAO is taking donations and donors are receiving governance tokens with no expectation of profit. These donations are not tax deductible at this point in time.
If you go back to Property class in law school and think of the “bundle of rights” associated with ownership—e.g., the rights of possession, control, exclusion, enjoyment, and disposition—this is about control. Donors to the ConstitutionDAO get a say in what happens to this copy of the Constitution, but it’s not like the physical object is going to make the rounds and hang in the living room of each donor for a specified time.
So what’s most likely to happen to this Constitution? Instead of keeping it behind closed doors—which is where it has been for the past 33 years, as part of the collection of the late real estate developer S. Howard Goldman, who bought it from Sotheby’s in 1988 for $165,000—the organizers of the Constitution DAO hope to make this document of the People, by the People, and for the People, available to… the People:
What will happen to the Constitution?
ConstitutionDAO is seeking an esteemed partner to publicly display the Constitution. The eventual home must have the expertise to properly house, store, and maintain the artifact. Additionally, the community has expressed strong preferences for institutions that are free to the public and willing to cover the costs associated with housing the document.
I’d suggest the National Constitution Center, led by president and CEO Jeffrey Rosen, a leading scholar of the Constitution. Although the NCC does charge admission, perhaps this copy of the Constitution could be located in an area that would be accessible to the public at no charge.
Some of you might be wondering: is ConstitutionDAO legit? To establish credibility and accountability, ConstitutionDAO’s founders and early donors have publicly identified themselves, and as noted by the Washington Post, they’re an impressive group. They include the chief technology officer of a crypto-based publishing platform, a partner at a crypto-focused venture capital fund, and the founder of a cabin community for online creators outside Austin.
The donors to ConstitutionDAO also include a prominent lawyer: Kathryn Haun, a former law clerk to Justice Kennedy and former federal prosecutor who’s now a general partner at Andreessen Horowitz, a leading venture-capital firm. Haun announced her contribution over Twitter, explaining it as follows:
And there is precedent for DAOs making multimillion-dollar purchases. Two months ago, PleasrDAO paid $4 million to buy “Once Upon a Time in Shaolin,” the one-of-a-kind album by Wu-Tang Clan that was previously owned by pharma bro turned felon Martin Shkreli. The seller of the album was the federal government, which presumably did its due diligence and concluded that PleasrDAO was a sufficiently legit purchaser.
So the history of DAOs includes some successes. But it’s not without cautionary tales, as Abram Brown of Forbes notes:
In 2016, one of the earliest DAOs suffered a hack with the attackers absconding with $50 million, none of it recovered. A more recent example from the crypto world: In October, a new cryptocurrency floated onto the market called Squid, designed to capture the attention of fans of the hit Netflix show Squid Game.
It was pretty apparent that Squid had no underlying value and no formal connection to the TV series. Nonetheless, people spent weeks bidding up the tokens’ price, raising it from fractions of a penny to nearly $600 a token. Then, earlier this month, the anonymous issuers of Squid disappeared, apparently making off with $2.5 million in investors’ money.
Hmm… collecting money from investors and then vanishing sounds a lot like… securities fraud. Which raises a question: are DAOs subject to the federal securities laws?
According to the Securities and Exchange Commission (SEC), quite possibly. Here’s what the SEC wrote back in 2017, after investigating a DAO with the oh-so-creative name of “TheDAO”:
The Commission is aware that virtual organizations and associated individuals and entities increasingly are using distributed ledger technology to offer and sell instruments such as DAO Tokens to raise capital. These offers and sales have been referred to, among other things, as “Initial Coin Offerings” or “Token Sales.”
Accordingly, the Commission deems it appropriate and in the public interest to issue this Report in order to stress that the U.S. federal securities law may apply to various activities, including distributed ledger technology, depending on the particular facts and circumstances, without regard to the form of the organization or technology used to effectuate a particular offer or sale.
And DAOs raise other issues as well. Do the organizers of a given DAO know who their investors or donors are, since the money being invested is taking the form of cryptocurrency? If their identities are not known, is that a problem? Could bad actors be participating in the DAO? Might there be issues related to money laundering or the Bank Secrecy Act?3
Now, Constitution DAO is different from many others, in ways that might matter for some of these questions. As stated on its website, “ConstitutionDAO is taking donations and donors are receiving governance tokens with no expectation of profit” (emphasis added). So a ConstitutionDAO token is not “an investment contract” under the Securities Act, which is defined as “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”
And although ConstitutionDAO has a public-minded purpose, its website makes clear that “donations are not tax deductible at this point in time.” So ConstitutionDAO doesn’t need to register as a tax-exempt organization under section 501(c)(3) of the Internal Revenue Code.
Still, as you’d expect of any venture involving presumably thousands of individuals and tens of millions of dollars, there are surely lots of legal issues here. And given how quickly ConstitutionDAO came together, I wonder whether knowledgeable lawyers had the opportunity to carefully consider all of the possible questions.
But don’t get me wrong: I don’t want to be a buzzkill, and I actually think ConstitutionDAO is a super-cool concept. When that gavel bangs tomorrow night at the auction’s end, I hope that the highest bidder is ConstitutionDAO.
UPDATE (4:32 p.m.): I just noticed this Constitution DAO FAQ (via @EvanBranigan), which discusses the legal issues in more detail. Here’s an excerpt:
How will the legal mechanics of the purchase work?
Our fiscal sponsor Endaoment, which has compliance with Sotheby’s know-your-customer requirements, will place a bid on behalf of the DAO when the auction goes live. When we win, Endaoment will take interim legal ownership of the document and is legally obligated per the terms of our partnership agreement to respect the DAO’s decisions related to it. After the initial purchase, the community will be able to restructure ownership to best reflect the mission and values of the DAO.
For more, see Section IV (Legal and Structural Questions) of the FAQ. The folks behind Constitution DAO have definitely thought about many of the legal issues, but I don’t have any expertise in this area, so I can’t evaluate their legal analysis. If you’re knowledgable about these matters, please read their FAQ, especially Section IV, and share your thoughts on it in the comments to this post.
UPDATE (11/18/2021, 2:13 p.m.): Typo corrected; the acronym “DAO” stands for Decentralized Autonomous Organization, not Digital Autonomous Organization.
UPDATE (11/20/2021, 2:49 p.m.): Alas, after an exciting auction that was super-fun to watch, ConstitutionDAO got outbid—by Citadel CEO Kenneth Griffin, who is buying the copy of the Constitution for $43.2 million. On the bright side, Griffin said he plans to lend the document to Crystal Bridges Museum of American Art in Bentonville, Arkansas, which does not charge admission (thanks to the generosity of Walmart heiress Alice Walton, its founder).
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ConstitutionDAO’s original goal was $20 million, Sotheby’s high estimate for this copy of the Constitution, but after hitting that amount, it raised its goal to $25 million and then $30 million. In light of results from recent Sotheby’s and Christie’s auctions, with many lots selling for above their high estimates, it was smart of ConstitutionDAO to raise its goal.
For example, imagine agents of a dictator like Kim Jong-un or Vladimir Putin making massive donations to ConstitutionDAO, then voting their tokens in favor of shipping off the Constitution to North Korea or Russia. If you look at the list of contributors, they’re either anonymous or use pseudonyms like “curmudgeon loves u,” “Knights of Degen Protectors of the Realm,” and “we're gonna steal (er, buy) the declaration of independence (er, consittution [sic]).”