How to (Legally) Create Community Ownership

Take notes, Doodles

👋🏽 Hello everyone, gm gm, WELCOME BACK to another edition of the Overpriced JPEGs newsletter. Today’s piece is brought to you by guest writer, Zack Guzman, former Yahoo Finance reporter & host of community-owned crypto show Coinage 

Edited by Carly Reilly

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2022 taught us 3 things: 

1. NFTs have the potential to unlock the power of aligned communities

2. Regulation is coming

3. What “effective altruism” is

I survived the ICO-boom of 2017 - where crypto projects touted a new paradigm in fundraising and collective ownership. Investors can participate in the upside of a business through token sales, they said. It will revolutionize private-market investing, they said. We’re all in this together, they said.

Instead, ICOs were quickly shut down. And now, NFTs could be next. 

After cracking down on serial crypto criminal *checks notes,* Kim Kardashian, it’s no wonder the SEC is on a war-path for some bigger wins - investigating companies like Yuga Labs and, apparently, all proof-of-stake coins. 

Against this backdrop, many projects are right to be nervous. 

But it’s not just the SEC who’s turning a more critical eye to the nature of these NFT projects.

Last September, Doodles raised $50 million from a handful of VCs, led by Alexis O’Hanian’s Seven Seven Six. There was backlash. Some of which could be categorized as holders waking up from the fever-dream that said owning a Doodle meant owning a piece of Doodles LLC.

wab.eth ❁ @wabdoteth

@Degentraland @doodles Didn't they already secure $50M from holders? 😂

O’Hanian helped to clarify. “The way I described it,” he said “[it’s] as if 100 years ago you could have bought shares in Disney, you’d have been happy to do that, but if you could have bought some of the original drawings of Mickey Mouse, you would’ve been really happy with that too.”

Conveniently for Alexis, he, unlike the rest of us, has both original drawings and shares. 

I’m an NFT enthusiast; I understand and agree with O’Hanian’s point. But wouldn’t it be great if the rest of us could also buy what we were tacitly or in some cases actually promised? Real community ownership.

As the founder of a Web3 media company and host of the community-owned crypto show Coinage, we wanted to drop NFTs that let people legally co-own our show and shape the trajectory of our business. 

We wanted our community members to contribute: helping us find stories worth covering, coming on as guests, leveraging their connections to book other guests, and fact checking our biases. And we wanted to reward them for that participation – not symbolically, not through hand-waving gimmicks, not tacitly, but actually. 

After months of consulting with lawyers, we landed on a legal framework that is gaining traction with many DAOs: co-ops. A structure that legally allows for collective ownership by NFT holders in a legal entity.

Last year, Coinage filed as a cooperative in the state of Colorado, and structured our NFTs to serve as tickets into our membership; allowing us to distribute dividends back to our members & entitling active community members, assisting in our show’s production, to a portion of our profits, without worrying that our NFTs will be considered securities. 

This means if our show gets picked up by a distributor or attracts sponsorship dollars, the entire cooperative and all of its members — provided they’re actually helping with the project — will benefit. 

The framework isn’t new; outdoor apparel store REI is one popular cooperative example, as is the Associated Press. But NFTs unlock unique abilities for digital co-ops: we can track ownership on-chain; coordinate contributions from our members more effectively; and there is a global, liquid market for trading co-op memberships.

Crypto Twitter musician Jonathan Mann - known for writing and recording 1 song per day for 14 years running - has also pursued a similar model for his community.

As Mann put it, “SongADAO is a new twist; it’s a registered co-op LCA, so legally, it’s a company. But it runs like a collective, so that everyone who supports Song A Day benefits from its success. The goal is equity; everyone gets their fair share.”

In the words of our accountant, the DAO-cooperative model using NFTs could “help bring cooperatives into the 21st century.” But for DAOs or NFT projects in general, it could also establish a regulatory framework that removes the legal headache while preserving the spirit of DAOs.

Of course, the cooperative model comes with some limitations. 

No one entity may own more than 50% of a cooperative, and memberships are limited to individuals. As such, there’s very little incentive for any one person to mint more than one NFT.  For projects focused on hyping their drops and quickly minting out, this could be a deal-breaker. For projects still focused on raising cash at all costs, courting venture capitalists and their interests still might be the priority. But at some point, that capital will want their needs (and returns) met. When push comes to shove, the little guy rarely wins.  

In the bull market of last year — when FOMO was a driving force — providing clarity on what exactly someone was buying with an NFT wasn’t worth the hassle. In a bear market, it might prove obligatory. And, if regulators are indeed about to drop the hammer on whether NFTs could be securities, it might not hurt for project founders to be one step ahead of it – both for themselves, but more importantly, for the communities and missions they serve.