Part III of the Decentralized Network Equity Series

Author’s Note: This is the third installment in the Decentralized Network Equity series and was partly inspired by a great conversation with Vlad S on the mechanics and real-world implications of a fee switch under CLARITY. Part I addressed the definitional framework for non-security network equity. Part II examined issuance pathways: gratuitous distributions, private placements, and the certification process. This Part III addresses the structural question that both prior installments deferred: what limited liability entity (if any) should house the decentralized governance system, and what happens if the answer is “none”?

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Having parsed the differences between House and Senate Banking versions of the market structure bill in past articles, I use “CLARITY” in this piece as shorthand to denote an amalgam of the House-passed CLARITY Act (H.R. 3633) and the January 2026 Senate Banking Committee substitute, reflecting converging provisions across both bills.

The Entity Question at the Heart of Decentralized Network Equity

Parts I and II of this series established a powerful proposition: under CLARITY, tokens can carry genuine economic rights (protocol fee distributions, governance-controlled treasury allocations, value appreciation tied to network growth) without becoming securities. The key is that those rights must flow from a decentralized governance system (DGS), not from promises by a centralized team or legal entity.

The CLARITY framework answers the securities classification question, but it does not answer the structuring question that every practitioner advising a fee-switch protocol will immediately confront: what legal entity, if any, should wrap the DGS implementing the fee switch? And more pointedly, are any US entities types on the table?

This turns out to be a harder problem than might first appear. CLARITY explicitly permits the DGS to operate through a legal entity, but imposes a “no centralized management” constraint that most entity forms are designed to violate. Forgo the entity entirely, and you achieve the cleanest possible DGS compliance, but expose every governance participant to general partnership liability by operation of state law. Wrap the DGS in an entity that provides liability protection, and you introduce structural constraints (nonprofit limitations, operating agreement requirements, management frameworks) that may compromise either the DGS carveout or the token’s economic model.

This is the entity structuring dilemma, or perhaps the trilemma (discussed below), depending on how you count competing objectives. Either way, it is the question that will determine whether US issuer-wrapped network equity tokens can deliver on their promise, or whether the legal infrastructure buckles under the weight of CLARITY compliance.

Before mapping the design options, we need to establish precisely what CLARITY requires of a DGS since every entity consideration flows from this definition.

What Is a Decentralized Governance System Under CLARITY?

The Statutory Definition

Both bills define a DGS in materially identical terms. A decentralized governance system means:

Any transparent, rules-based system permitting persons to form consensus or reach agreement in the development, provision, publication, maintenance, or administration of [the] blockchain system, where participation is not limited to, or under the effective control of, any person or group of persons under common control.

House: Securities Act § 2(a)(24)(A), as amended. Senate: § 2(5)(A).

This definition has three operative requirements:

1. Transparency and Rules-Based Operation. The system must operate pursuant to publicly visible, pre-established rules, rather than discretionary decision-making by insiders. Onchain governance protocols with published voting parameters, quorum requirements, and execution logic satisfy this element. Multisig wallets controlled by an anonymous committee likely do not.

2. Consensus or Agreement Function. The system must enable participants to reach collective decisions regarding the blockchain system’s development, provision, publication, maintenance, or administration. This encompasses protocol upgrades, parameter changes, treasury deployment, and, critically for our purposes, the activation and distribution of protocol fees.

3. No Effective Control by any Person or Group Under Common Control. Participation cannot be limited to, or under the effective control of, a person or group of affiliated persons. This is the decentralization requirement proper.

The Legal Entity Accommodation

Both bills include an identical and enormously consequential provision. A DGS “shall include a legal entity used to implement the rules-based system described in subparagraph (A), provided that the legal entity does not operate pursuant to centralized management.” The Senate bill adds explicit language: “including a decentralized unincorporated nonprofit association or other entity created pursuant to State law.” Both bills further specify that “the delegation of ministerial or administrative authority at the direction of the participants in a decentralized governance system shall not be construed to be centralized management.”

House: § 2(a)(24)(C). Senate: § 2(5)(C).

Each version of CLARITY acknowledges the need for issuer wrapping and explicitly contemplates that a DGS may operate through a legal entity, provided that entity functions as an implementation vehicle for the rules-based governance system rather than as a centralized decision-maker in its own right.

The Separation of Persons Rule and the DGS’s Exempted Personhood

Both bills establish that a DGS and its participants “shall be treated as separate persons unless such persons are under common control or acting pursuant to an agreement to act in concert.” House: § 2(a)(24)(B). Senate: § 2(5)(B).

This clause does two things. First, it treats the DGS as having a form of statutory personhood — it is a “person” separate from its participants. Second, it prevents participants’ actions from being automatically attributed to the DGS (and vice versa) absent common control or concerted action. The DGS is a person; it is simply a person whose participants are not collapsed into it.

But CLARITY does not stop at recognizing the DGS as a person. It then systematically exempts the DGS from the consequences that normally attach to personhood under the securities laws — and it does so provision by provision, in specifically scoped contexts.

The Exemption Architecture

The disqualifying financial rights carveouts. Senate § 4B(a)(6)(B)(III)-(IV) exclude payments or financial interests from “a person (other than a decentralized governance system).” The parenthetical structure is significant: it uses the same grammatical form as any statutory carveout that presupposes membership in the broader category. “A person (other than a decentralized governance system)” means the DGS is a person; it is simply a person from which economic flows are exempted from the disqualifying rights analysis. If the DGS were not a person at all, the parenthetical would be surplusage. The House uses the same structure at § 1a(16)(F)(iii)(I)(AA), carving out ownership interests in “a decentralized governance system” from the disqualifying exclusions.

The mature blockchain system safe harbor. House § 42(d)(1) provides: “For the purposes of this section, a decentralized governance system is not a ‘person’ or a ‘group of persons under common control.’” The scoping language, “for the purposes of this section”, is doing critical work. This is not a global declaration that the DGS lacks personhood. It is a section-specific fiction that strips the DGS of person status solely for purposes of the maturity certification analysis. The DGS’s voting power and governance authority don’t count against the “no person or group controls 20% of voting power” threshold. Outside this section, the general personhood treatment remains intact.

The programmatic distribution safe harbor. Senate § 4B(a)(4)(v)(vi) provides: “[A] decentralized governance system shall not be deemed a person or group with unilateral authority unless its participants are under common control, or acting pursuant to an agreement to act in concert.” Again, this is context-limited and scoped to the requirements for programmatic and automated distributions. The DGS is exempted from being treated as a “person with unilateral authority” in this specific context, implying that in the general case the DGS retains its personhood status.

The pattern: CLARITY does not categorically deny the DGS personhood. It grants the DGS a form of statutory personhood (separation of persons clause) and then exempts the DGS from the adverse consequences that would otherwise flow from that personhood (disqualifying financial rights, common control attribution, maturity certification blocking) in specifically scoped provisions. The architecture is: DGS as exempted person, not DGS as non-person.

Why the DGS’s Exempted Person Status Matters for Entity Selection

This interpretation has direct consequences for the entity structuring question.

The disqualifying financial rights under both bills (equity interests, dividends, profit-sharing) are disqualifying when they flow from a person. Economic rights flowing from the DGS also flow from a person, but the statutory carveouts exempt those flows from disqualifying treatment. The token carries real economic rights; those rights flow from a person (the DGS); but that person is exempted from the rules that would otherwise convert those rights into securities classification triggers.

The entity structuring question then becomes: if a protocol wraps its DGS in a legal entity (a DUNA, a DAO LLC, a Delaware C, etc.), does the legal wrapper destroy the DGS’s status (and with it, the exemption)?

CLARITY’s legal entity accommodation (House § 2(a)(24)(C) / Senate § 2(5)(C)) answers this directly. It functions as a conditional savings clause: the mere fact that a legal entity wraps or implements the DGS does not, standing alone, pull the system out of DGS status. The statute provides that a DGS “shall include a legal entity used to implement the rules-based system,” provided the entity “does not operate pursuant to centralized management.”

The “no centralized management” proviso is not a separate test layered on top of the DGS definition. It is the DGS definition, restated in entity-specific terms. The entity cannot introduce centralized control that the DGS definition prohibits. If the entity operates pursuant to centralized management, the system no longer qualifies as a DGS. Not (arguably) because the entity “stripped” the exemption, but because the governance system, viewed as a whole, is now under centralized control and fails the definition at step one.

Both bills further specify that “the delegation of ministerial or administrative authority at the direction of the participants in a decentralized governance system shall not be construed to be centralized management.” This confirms that routine entity-level functions, such as maintaining a registered agent, filing with a secretary of state, executing onchain governance decisions in the off-chain world, do not, by themselves, introduce the kind of centralized management that defeats DGS status.

The implication: the legal structure through which the DGS operates is not merely a governance design question; it also becomes the securities classification question. But the practitioner does not need to trace “exemption inheritance” through an entity wrapper or determine whether economic flows are “from” the entity or “from” the DGS. Rather, the question is: does the entity introduce centralized management that defeats the DGS definition? If no, the DGS is still a DGS, and its exemptions apply regardless of the wrapper. If yes, there is no DGS at all, and the exemptions were never available.

The Entity Question: Can Any US Entity Type Satisfy the DGS Requirements?

The DGS definition permits a legal entity wrapper, but imposes the “no centralized management” constraint. This creates a tension: most legal entities are designed to centralize management. The question is which entity types, if any, can be structured to function as DGS implementation vehicles while preserving the liability protection and tax compliance that make entity formation worthwhile in the first place.

The Wyoming DUNA

The DUNA (Decentralized Unincorporated Nonprofit Association) is the entity type most directly designed for this purpose (and the only one explicitly named in the Senate bill’s DGS definition). Wyoming’s DUNA statute (Wyo. Stat. § 17-32-101 et seq.) was drafted to provide legal personhood for onchain governance systems.

Strengths for DGS Compliance:

The DUNA allows governance to be conducted through “blockchain-based” processes, meaning the onchain voting mechanism can serve as the DGS decision-making system rather than a board or manager. Members participate in governance through token-weighted voting rather than through centralized officers. The ministerial/ administrative delegation carveout in CLARITY appears tailor-made for the DUNA’s registered agent and basic filing requirements.

The DUNA provides separate legal existence. It can hold property, enter contracts, sue and be sued. And critically, it provides limited liability protection for members. Wyo. Stat. § 17-32-107.

The Savings Clause in Practice:

Under the savings clause framework, the DUNA does not need to “inherit” the DGS’s exemption. The question is simply: does wrapping the DGS in a DUNA introduce centralized management that defeats the DGS definition?

For a properly structured DUNA, the answer should be no. The DUNA’s governance is conducted through onchain voting. The DUNA’s registered agent and basic Wyoming filings are ministerial functions that CLARITY explicitly excludes from the “centralized management” analysis. Looking through the DUNA to the underlying system, the governance mechanism remains transparent, rules-based, and not under the effective control of any person or group. The DGS is still a DGS. Its exemptions still apply.

The risk arises if the DUNA’s organizational structure introduces discretionary authority that goes beyond ministerial functions. If a DUNA’s governing documents reserve material decision-making power to designated officers or a committee: upgrade approval, treasury deployment, fee parameter changes, etc. That kind of discretionary authority may constitute centralized management.

Practitioner guidance: the DUNA’s organizational documents should delegate all material governance decisions to onchain governance and limit the entity’s officers or representatives to ministerial and administrative functions. The closer the DUNA hews to pure implementation of onchain governance outputs, the cleaner the savings clause argument.

The Nonprofit Constraint:

The DUNA is a nonprofit entity form. This creates genuine friction with fee-switch/network equity models where the objective is direct value accrual to tokenholders.

Nonprofit entities generally cannot distribute net earnings to members. Whether Wyoming’s DUNA statute imposes this constraint with the same force as IRC § 501(c)(3) is an open question. The DUNA is not a 501(c)(3) and is not required to be one, but practitioners should not assume the nonprofit designation is a nullity. If direct profit distribution to members is inconsistent with the DUNA’s statutory framework, protocols must rely on indirect value accrual: buybacks, burns, ecosystem grants, or service-based compensation for governance participation.

Here is where CLARITY’s DGS carveout interacts with entity law in a way that may not dovetail as neatly as we all would like. However, even if a DUNA cannot directly distribute profits to members under state law, the protocol’s smart contracts, operating as the rules-based system the DUNA implements, may be able to distribute value through programmatic mechanisms (fee distributions, staking yields, automated buybacks) that the DGS “governs” rather than “pays.” The question is whether this distinction holds: is a DGS-governed smart contract distributing protocol fees to tokenholders substantively different from a nonprofit distributing profits to its members?

If yes, the DUNA becomes a powerful vehicle: it provides entity-level liability protection, satisfies the DGS legal entity accommodation, and the protocol’s value-accrual mechanism operates through the system the DUNA implements rather than through the DUNA itself. If no, then the nonprofit constraint binds, and direct fee-switch distributions through a DUNA-wrapped DGS are problematic.

The Wyoming DAO LLC

Wyoming’s DAO LLC statute (Wyo. Stat. § 17-31-101 et seq.) permits LLCs to be managed by their members through smart contracts. Unlike the DUNA, the DAO LLC is not limited to nonprofit purposes and can distribute profits to members.

Strengths:

The DAO LLC directly enables profit distribution to members, resolving the DUNA’s nonprofit friction. Members can participate in governance through token-weighted voting. The LLC provides both limited liability and flexible tax classification (default partnership pass-through, or election as a corporation).

DGS Analysis Under the Savings Clause:

The question is the same as with the DUNA: does the DAO LLC introduce centralized management that defeats the DGS definition? The DAO LLC presents a harder case. Wyoming’s statute still contemplates that the LLC has an operating agreement and potentially managers or member-managers. The existence of an operating agreement that allocates specific decision-making authority, and designated managers with defined roles, creates more surface area for a centralized management finding than the DUNA’s minimal organizational structure.

If the operating agreement delegates all material decisions to the onchain governance mechanism and limits managers to ministerial and administrative functions, the savings clause should protect DGS status. But if the operating agreement reserves material authority to managers, the system, viewed as a whole, is at risk.

Additionally, state DAO LLC structures often create pressure toward identified/permissioned membership for tax, compliance, and administrative reasons. For pseudonymous tokenholder governance, this creates practical tension: the entity form requires knowable members, but the DGS contemplates open, permissionless participation.

Traditional LLCs and Corporations

Standard LLCs and corporations are generally poor fits for the DGS entity accommodation.

A manager-managed LLC concentrates authority in one or more managers, the paradigm of centralized management. A member-managed LLC comes closer but typically requires identified members and an operating agreement that allocates specific decision-making authority, creating friction with permissionless governance.

Corporations are managed by boards of directors and officers; inherently centralized. This is precisely the kind of structure that CLARITY’s DGS definition appears to exclude: participation under the effective control of a group of persons (the board) under common control.

The Cayman Foundation Company

Many crypto projects use Cayman Islands foundation companies as their governance wrapper. These are not US entities, so they fall outside the scope of this analysis in terms of state law compliance. However, CLARITY’s DGS definition is entity-agnostic — it applies to “a legal entity used to implement the rules-based system” without specifying US formation. A Cayman foundation structured to implement onchain governance decisions without centralized management could potentially qualify, though the perpetuation of Cayman foundations would seem, in my opinion, to confound the spirit and intent of market structure legislative efforts in repatriating innovation to US.

Note: Cayman foundations aren't just contrary to the spirit of repatriating innovation, the House bill affirmatively excludes non-US domiciled persons from the primary issuance pathway. Projects using Cayman structures would need to either reorganize under US law for issuance (and could still use the Cayman entity for other purposes), or rely exclusively on gratuitous/end user distributions that don't trigger the § 4(a)(8) requirements.

The General Partnership Alternative: No Entity, Maximum DGS Compliance, Maximum Risk

If the goal is a truly decentralized onchain governance system with no centralized management, the cleanest way to achieve that is to have no entity at all. No board. No operating agreement. No officers or managers. Just the protocol, the governance mechanism, and the tokenholders.

This approach has a seductive structural elegance, and it may, paradoxically, be the most compliant path to DGS status under CLARITY.

Why Entity-Less Governance May Best Satisfy the DGS Definition

CLARITY defines a DGS as “any transparent, rules-based system” where participation is “not limited to, or under the effective control of, any person or group of persons under common control.”

An entity-less, onchain governance system satisfies this definition almost by tautology.

The CLARITY legal entity accommodation is permissive, not mandatory: a DGS “shall include” a legal entity that meets the criteria. But the base definition does not require an entity. An entity-less DGS is the default; the entity accommodation is the exception.

But: General Partnership Formation by Operation of Law

Here is where state law imposes consequences that the federal securities framework does not address.

Under the Revised Uniform Partnership Act (RUPA § 202), a general partnership forms when two or more persons “carry on as co-owners of a business for profit.” No filing. No agreement required.

A fee-switch governance vote where tokenholders collectively decide to activate protocol revenue and accrue it pro rata checks both classical indicia of partnership formation:

Profit-sharing. RUPA § 202(c)(3) creates a rebuttable presumption that a person who receives a share of profits is a partner. Fee-switch distributions tied to governance token holdings derived from protocol operations, representing a return on participation constitute profit-sharing. None of the statutory carve-outs (compensation for services, payment of debt, rent) apply cleanly to pro rata fee distributions.

Control and management participation. Onchain governance voting is management participation. Tokenholders vote on operational parameters of a revenue-generating enterprise. The more governance power tokenholders exercise, the stronger the co-management inference.

The result: An entity-less protocol with active fee-switch governance likely constitutes a general partnership under state law. That means joint and several unlimited personal liability for every partner (RUPA § 306(a)), including contractual obligations, tort liability, regulatory penalties, and litigation judgments.

The CLARITY Tension

This creates a direct structural tension with CLARITY’s framework:

CLARITY says: The DGS is a person, but an exempted one. Its participants are treated as separate persons. Economic rights flowing from the DGS are exempt from the disqualifying rights analysis. Context-specific provisions strip the DGS of person status for purposes of maturity certification (House § 42(d)) and programmatic distribution requirements (Senate § 4B(a)(4)(v)(vi)).

State partnership law says: Persons carrying on as co-owners of a business for profit are partners. Partners are jointly and severally liable for partnership obligations.

CLARITY addresses securities classification. It does not preempt state partnership law. The DGS’s exempted status under federal securities law says nothing about whether the participants in the DGS have formed a general partnership under state law by virtue of collectively managing a profit-generating enterprise. A token can be a non-security digital commodity under federal law while its holders are simultaneously general partners under state law.

Moreover, the DGS’s exemptions under CLARITY are securities-law specific. The exempted personhood that shields the DGS from disqualifying financial rights treatment does not extend to state partnership formation analysis. If there is no legal entity with separate existence interposing itself between the governance participants and the business they collectively manage, i.e. if the DGS is just the onchain system itself, with no DUNA or LLC wrapper, then the participants are the only legally recognized persons in the picture, and they are carrying on a business for profit. That is the textbook general partnership formation scenario.

This is perhaps the strongest structural argument for an entity wrapper: not because CLARITY requires one, but because state law does, at least if you want to avoid general partnership by default.

The Tax Black Hole

If a general partnership exists by operation of law, Subchapter K of the Internal Revenue Code applies. This means:

Pass-through taxation. Each partner is taxed on their distributive share of partnership income (IRC § 704), regardless of whether income is actually distributed. The “partnership” must file Form 1065. A partnership representative must be designated under IRC § 6223.

Operational impossibility. For a pseudonymous, permissionless tokenholder base: K-1s require names, addresses, and TINs — unavailable for wallet addresses. There is no identifiable partnership representative. Distributive shares shift continuously as tokens trade. US partners face phantom income with no K-1 and no reporting infrastructure.

VC concentration risk. US institutional investors (venture funds, their LPs, endowments, pension funds) cannot participate in structures generating unreported income. If a general partnership exists and no K-1s are issued, those investors face penalties for failure to report, audit risk, LP-level compliance failures, and UBTI exposure for tax-exempt LPs. For non-US participants, the complications multiply across ECI analysis (IRC § 864), FIRPTA, withholding (IRC § 1446), and FATCA.

The Trilemma: Mapping Entity Choices to DGS Compliance

The analysis above reveals a genuine structural trilemma. Protocols pursuing fee-switch value capture under CLARITY can optimize for any two of three objectives:

Objective 1: Clean DGS compliance. The governance system cleanly satisfies CLARITY’s “transparent, rules-based system” with “no centralized management” — securing the carveout that permits economic rights without securities classification.

Objective 2: Direct value accrual to tokenholders. Protocol revenue flows to governance token holders as economic return; the fee-switch model in its purest form.

Objective 3: Liability protection and tax compliance. No general partnership risk, no joint and several unlimited liability, feasible tax reporting, and a structure that institutional capital can participate in.

The Tradeoff Matrix

No Entity (General Partnership by Default) — Objectives 1 + 2: The cleanest DGS compliance and purest fee-switch economics. No entity-level constraints on distributions. No centralized management to negate. But: general partnership liability exposure for all governance participants, and a tax compliance regime that is functionally impossible for a pseudonymous tokenholder base. Viable for small, identified governance communities willing to accept the risk. Untenable for protocols with broad token distribution and institutional investor participation.

DUNA — Objectives 1 + 3: Strong DGS compliance (onchain governance is the decision-making mechanism; entity handles ministerial functions). Limited liability protection for members. But, the nonprofit constraint creates friction with direct profit distribution. Value accrual must flow through indirect mechanisms (buybacks, burns, ecosystem grants, service-based compensation) rather than direct fee-switch dividends. The protocol’s smart contracts may distribute value in ways that the DUNA “implements” but does not itself “pay,” but this distinction requires careful analysis.

DAO LLC — Objectives 2 + 3 (with Objective 1 Risk): Permits direct profit distribution to members with limited liability protection. But: the LLC’s operating agreement and management structure create more surface area for a centralized management finding. If the operating agreement delegates all material governance to the onchain system, looking through the entity the DGS definition is satisfied and the savings clause protects DGS status. But if the operating agreement reserves material authority to managers, the system fails the DGS definition at the threshold.

Traditional Entity (LLC/Corp) — Objectives 2 + 3: Direct profit distribution and liability protection. But: centralized management inherent in the entity form likely defeats the DGS definition. Looking through the entity, the underlying governance system is under the effective control of a board or managers. No qualifying DGS exists, no exemptions apply, and the token’s economic rights are disqualifying.

Design Options and Structuring Approaches

Given the trilemma, practitioners advising protocols on fee-switch governance should evaluate the following approaches, ranked by DGS compliance strength:

Approach 1: DUNA with Indirect Value Accrual

Structure: Organize the DGS as a Wyoming DUNA. Onchain governance determines all material protocol decisions. The DUNA handles ministerial functions (registered agent, Wyoming filings). Protocol revenue flows through smart contracts governed by the DGS; value accrues to tokenholders through buybacks, burns, or staking yield rather than direct profit distributions.

DGS Compliance: Strong. The DUNA is explicitly referenced in the Senate bill and designed for onchain governance. No centralized management.

Value Accrual: Indirect. Buyback-and-burn or programmatic yield mechanisms rather than direct dividends. This constrains the range of available economic structures but preserves non-security classification.

Liability/Tax: Limited liability through DUNA membership. Tax classification requires advance analysis (partnership vs. association).

Best For: Protocols with institutional investor bases that require liability protection and where indirect value accrual mechanisms are sufficient.

Approach 2: DAO LLC with Maximally Delegated Governance

Structure: Organize the DGS as a Wyoming DAO LLC. The operating agreement delegates all material governance decisions to the onchain mechanism. Managers are limited to ministerial and administrative functions — filing documents, maintaining the registered agent, executing onchain governance decisions in the off-chain world.

DGS Compliance: Contestable. Depends on whether the operating agreement’s delegation is sufficient to satisfy “no centralized management.” The CLARITY ministerial delegation carveout supports this structure, but the LLC form inherently contemplates managed authority, and the SEC may argue that the existence of an operating agreement and designated managers constitutes centralized management — even if those managers lack discretionary authority.

Value Accrual: Direct. The LLC can distribute profits to members without the nonprofit constraint.

Liability/Tax: Limited liability. Default partnership taxation with identified members. If the membership is pseudonymous or permissionless, the tax compliance issues discussed above resurface.

Best For: Protocols with identified governance participants (semi-permissioned governance) willing to accept some DGS compliance risk in exchange for direct distribution capability.

Approach 3: Entity-Less with General Partnership Risk Acceptance

Structure: No legal entity. The protocol and its onchain governance mechanism constitute the DGS directly. Tokenholders participate in governance and receive fee-switch distributions without entity intermediation.

DGS Compliance: Strongest. No entity-level management to analyze. The onchain system is the DGS. The statutory definition is satisfied almost tautologically.

Value Accrual: Direct. No entity-level constraints on distribution mechanisms.

Liability/Tax: None. General partnership by default. Joint and several unlimited liability. Subchapter K applies with no compliance infrastructure.

Best For: Protocols with highly distributed governance, no meaningful litigation exposure, and governance participants who understand and accept the liability risk. Realistically, this is the current state of most DeFi governance — operating without entity wrappers and without having grappled with the partnership implications.

Approach 4: Hybrid — DUNA Governance + Protocol-Level Distribution

Structure: A DUNA serves as the DGS implementation vehicle, providing liability protection and entity-level operational capacity. But the fee-switch mechanism operates at the protocol level. Smart contracts collect and distribute fees programmatically based on governance parameters set by the DGS. The DUNA governs; the protocol distributes.

DGS Compliance: Strong. The DUNA handles ministerial functions only; all material governance flows through onchain voting. Looking through the entity, the underlying system satisfies the DGS definition. The savings clause protects DGS status.

Value Accrual: Potentially direct, and this is where the separation of the DGS from the entity wrapper matters. The fee switch is a governance output of the DGS, executed programmatically by the protocol's smart contracts. The DUNA’s membership never passes a resolution to distribute profits as it has no such authority. The distribution happens because the governance system directed it, not because the nonprofit entity decided to pay its members. The DUNA’s nonprofit constraint may not bind on distributions that the DGS directs through protocol-level mechanisms, because those distributions are a function of the governance system the DUNA implements, not a corporate action of the nonprofit entity itself. This is the key characterization question: is the economic substance “DUNA distributes profits to members” (potentially barred by nonprofit status) or “DGS directs fee distributions through protocol mechanisms, and the DUNA merely stewards the system” (a governance function, not a corporate distribution)?

Liability/Tax: Limited liability through DUNA membership. Tax treatment depends on whether protocol-level distributions are characterized as income attributable to the DUNA (entity taxation) or as direct protocol participation independent of the entity.

Best For: Protocols seeking the strongest available combination of DGS compliance, liability protection, and value accrual — accepting the structural complexity and characterization risk at the state law level. This is the model that comes closest to resolving the structuring dilemma.

Practitioner Takeaways

1. Entity selection is a securities law question, not just a governance design question. Under CLARITY, the DGS is a person, but an exempted person whose economic flows don’t trigger disqualifying rights. The legal entity accommodation functions as a savings clause: the entity wrapper doesn’t destroy DGS status, provided the entity doesn’t introduce centralized management. But if it does, the system fails the DGS definition at the threshold — there is no DGS, no exemption, and the token’s economic rights are disqualifying.

2. The DGS’s exempted personhood is the foundation of network equity and the source of the structuring dilemma. CLARITY grants the DGS personhood and then exempts it from the adverse consequences, provision by provision. But those exemptions are securities-law specific. They don’t shield governance participants from general partnership formation under state law, and they don’t resolve the state-law entity constraints (nonprofit limitations, operating agreement requirements) that determine how the DGS can distribute value.

3. The DUNA is the strongest available entity option for DGS compliance. Looking through the DUNA to the underlying onchain governance system, the DGS definition is satisfied and the savings clause protects DGS status. The DUNA’s minimal organizational structure (governance by token-weighted voting, no board, no managers with discretionary authority) creates the least surface area for a centralized management finding. But the nonprofit constraint on direct profit distribution remains a state-law question that CLARITY does not address.

4. The general partnership risk is underappreciated and serious. CLARITY’s exemptions are securities-law specific. Without an entity wrapper, governance participants are the only legally recognized persons under state law, and they are carrying on a business for profit. This may be the strongest structural argument for an entity wrapper: not because CLARITY requires one, but because state law does.

5. The hybrid DUNA + protocol-level distribution model deserves close analysis. The DGS directs fee distributions through protocol mechanisms; the DUNA merely implements the system. If this characterization holds at the state law level, the nonprofit constraint may not bind because the distributions are a governance function, not a corporate action of the nonprofit entity.

6. House § 42(d) and Senate certification processes accommodate entity-wrapped DGS structures. The section-specific non-person treatment in § 42(d) means the DGS’s voting power doesn’t count against maturity thresholds. Looking through the entity wrapper, the savings clause analysis applies: if the underlying system is still a DGS, entity wrapping is irrelevant to the certification analysis.

7. Resolve tax classification before organizing. The DUNA’s uncertain tax treatment, the DAO LLC’s partnership default, and the general partnership’s Subchapter K exposure all create compliance obligations that must be addressed at formation, not after the first fee distribution triggers reporting requirements.

Conclusion

The securities law framework for network equity is further along than many practitioners realize. CLARITY, in whatever final form it takes, will create a viable path for tokens to carry real economic rights without registration. Parts I through III of this series have mapped that path from definition to issuance to entity structure.

But the entity infrastructure hasn’t caught up to the securities law framework. The trilemma is real, and no existing US entity type resolves it cleanly. The DUNA comes closest, and the hybrid model outlined in Approach 4 may ultimately prove to be the right architecture, but the critical characterization questions (Does the nonprofit constraint bind on DGS-directed protocol distributions? Does the savings clause survive SEC scrutiny? Can a DUNA’s tax classification support a fee-switch model?) remain open.

These may not be questions that will be answered by legislation or rulemaking. They will likely be answered by practitioners willing to structure the first deals, test the first characterizations, and build the precedent.

This analysis draws on the House-passed CLARITY Act (H.R. 3633) and the January 2026 Senate Banking Committee substitute. Specific structuring decisions require counsel familiar with the particular facts and applicable law. References to “CLARITY” denote a composite of converging provisions across both bills and do not suggest that a final enacted version has been adopted.